VC Trend

Globalizing
venture capital
Global venture capital insights
and trends report 2011
2 Globalizing the VC industry
Foreword
Amid the fragile economic recovery and highly volatile capital
markets of 2011, the venture capital (VC) sector is becoming
increasingly globalized. A shift toward the emerging markets
can be seen in geographic VC patterns and the growth of new
global VC hotbeds. Although the United States will likely remain
at the leading edge of VC-backed innovation for many years to
come, US VC fund-raising continues its decade-long decline.
Elsewhere, in China, India and other emerging markets, vibrant
innovation hotbeds and entrepreneurial talents are arising, and
investors are focused on less risky, later-stage deals, at least
for now.
Although unrealistic valuations may dampen future returns,
Chinas VC industry reached record heights in 2011 and will
soon surpass Europe as the second-largest venture hub for
fund-raising in the world. Both Chinas and Indias strong
VC industries are expected to continue their rapid growth
and development as they capitalize on strong GDP growth,
growing domestic consumption and a dynamic entrepreneurial
ecosystem. At the same time, due to Europes sovereign debt
crisis and its muted medium-term growth potential, Europes VC
industry has lost some of its robustness.
Globally, companies are staying private longer, due to large
corporations seeking proven business models prior to an
acquisition and investors that prefer companies with a proven
protability path both before and after the IPO. As angel
investors have become major investors in early-stage start-ups,
particularly in the US, the competition has nudged VCs toward
later-stage, high-growth ventures.
Broadly speaking, the more mature VC markets of the US and
Europe favor earlierstage investments, while the emerging
markets of China and India generally prefer later-stage
companies. In China and India, IPOs represent the vast majority
of exits for VC-backed companies. But in the US, Europe
and Israel, the main exit route for VC-backed companies is
acquisitions (M&A), representing more than 90% of all exits.
Furthermore, VC rms are also selling companies to private
equity rms as a third path to liquidity.
Contrary to the popular perception that global VC investment
has been concentrated primarily in the frothy digital media
sector, VC funding has been quite evenly spread across sectors
and life-cycle stages and has progressed at a reasonable pace.
Worldwide, the VC universe continues to shrink as limited
partners focus on top performers or forego VC altogether.
However, the sectors continued long-term consolidation is
viewed as good for the sector, with fewer players investing
smaller amounts in companies that will reach protability faster
than they do today. Large corporations striving to maintain
market leadership are partnering with VC rms to access
external innovation and a pipeline of new products and services.
This report explores these themes in our articles and
interviews, including:
Interviews with top VC investors and entrepreneurs from
around the globe
Paradigm shifts in venture capital, our keynote article with
insights on VC investment, IPO, M&A and valuations, based on
data from 2005 to 2011
Key trends in the global digital media and biotechnology
sectors and from global corporate venturing
An in-depth analysis of the key global VC hotbeds of the US,
China, Europe, India and Israel
We hope you nd Globalizing venture capital, our ninth annual
report on venture capital, to be a source of valuable insight.
We look forward to working together with you on the global
challenges and opportunities that lie ahead.
Maria Pinelli
Global Vice Chair
Strategic Growth Markets
Global venture capital insights and trends report 2011 3
Contents
04 Global VC trends
05 Paradigm shifts in venture capital
10 Key global venture insights (200511)
14 Global VC hotbeds
Americas
United States
15 VC trends
18 VC interviews: Lawrence Lenihan, FirstMark Capital, and
Jeffrey Glass, Bain Capital Ventures
20 Entrepreneur interview: Barry Silbert, SecondMarket
Brazil
21 VC interview: Clovis Meurer, CRP Companhia de Participaes
Asia
China
22 VC trends
25 VC interview: Gary Rieschel, Qiming Venture Partners
India
26 VC trends
28 VC interview: Sudhir Sethi, IDG Ventures India
Japan
29 VC interview: Toshihisa Adachi, Itochu Technology Ventures/JVCA
Greater Europe
Europe
30 VC trends
33 VC interview: Simon Cook, DFJ Esprit LLP
Israel
34 VC trends
36 VC interview: Daniel Cohen, Gemini Israel Funds
Russia
37 VC interview: Yan Ryazantsev, Russian Venture Company/OJSC
38 Global VC hot topics
39 Global corporate venturing trends
44 Global digital media trends
48 Global biotechnology trends
51 Biotech VC interview: Hans Peter Hasler, HBM BioVentures
52 Entrepreneur interviews: Gil Shwed, Check Point Software
Technologies Ltd., and Olivia Lum, Hyux Ltd.
54 Global PE/VC Country Attractiveness Index
55 Contacts and
acknowledgements
Global VC trends
As the economic pendulum swings toward the rapidly
developing economies, the venture capital sector is
experiencing its own paradigm shifts, reecting an
increasingly globalized world.
The globalization of venture capital is taking many forms,
ranging from global fund-raising and cross-border investment,
to exits on foreign stock exchanges or by foreign acquisition, to
VC rms opening ofces overseas and helping their portfolio
companies access markets in new regions.
This article analyzes the trends in fund-raising for VC funds,
the different investment patterns between the mature and
emerging venture markets, the associated exit mechanisms by
geography and, nally, the new funding sources going forward.
Top-tier VC funds dominate in the West
as VC consolidation continues
Global dry powder is US$117.7 billion (capital committed to
VC rms but not invested yet) and remains at a level similar to
the past few years, as VCs invest at a pace that is reected by
their fund-raising volume.
1

In 2011, 376 VC funds were fund-raising globally, trying to
raise US$53.6 billion.
2
Between 30% and 50% of all the funds
in the fund-raising stage are unlikely to make it at all or will do
so at a substantially reduced size. VC funds closing in 2011
had a buoyant start but dropped off in the second quarter.
3

The top-tier VC rms close much faster than the average fund.
The average fund-raising takes 12 to 18 months, while the
top decile of funds in the key VC hotbeds manage to close in
3 to 5 months.
In the US, fewer funds are raising more capital. US venture
funds that closed during 2011 had 5% more capital than those
closed in 2010, hitting US$16.2 billion. However, the number
of funds that closed plummeted 12% to 135 funds, and for
1
PREQIN, March 2012.
2
PREQIN, January 2012.
3
Of the 20 that closed in 2Q 2011 with US$5.8 billion, the largest ve had 66%, or
US$3.8 billion. 1Q 2011 had reached 2008 levels with 47 funds at US$10 billion.
the rst time in three years, the median fund size rose to
US$140.0 million.
By contrast, the story for European venture funds was one of
struggle, recording the worst volume since 2004. European
fund-raising declined 11% to US$3 billion (amount closed)
for 41 funds.
4
In contrast to the US, European funds showed
a distinct preference for early stages. (Of the 41 funds that
closed, 27 early-stage funds took US$2.1 billion of the total
US$3 billion closed.)
Rapid growth of fund-raising in China and India
The Chinese VC market is growing rapidly. In 2011, China
saw 382 new VC funds raise a record US$28.2 billion for
investments into Chinese VC-backed companies.
5
This
represents 2.53 times of the amount raised in 2010. Twenty
of the new funds raised US$100 million or more.
The growth capital venture space in India is getting
overcrowded. With about 400 VC funds in operation, this glut
has driven up valuations, prompting concerns by many private
equity investors.
6
Yet there is still plenty of room for early-stage
VC funds, especially in the almost empty pre-revenue space.
Growing VC trend toward
international investment
The next ve years (201115) should see a major shift in
geographic venture investment patterns and substantial growth
in the new global VC hotbeds.
7
Currently, the vast majority of VC rms invest just in their
own local home markets; however, more will be investing
internationally in the near future. Currently, only about 20% of
4
This compares unfavorably to US$2 billion for 26 funds in 2010 and US$2.9 billion for
26 funds in 2009.
5
Zero2IPO (January 2012), which covers international and local VC rms in China.
6
According to The Economic Times in India (26 September 2011), Marquee Silicon Valley VC
Accel Partners has scrapped plans to raise a US$400 million India-focused growth capital
fund. Likewise for corporate investors, such as the Jubilant Group, which has shelved its fund
sponsorship idea.
7
According to the National Venture Capital Association (June 2011) nine-country survey, with
347 Venture Capital Firms.
Paradigm shifts in venture capital
Globalizing the VC industry 6
977 369 367 286 274 217 150 141 120 119 101 59 37 35
$
1
2
,
5
9
2
$
3
,
8
1
8
$
3
,
3
2
7
$
3
,
0
0
3
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2
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8
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0
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6
$
9
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3
$
6
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5
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0
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4
Source: Dow Jones VentureSource, 2012
Amount raised, by hotbed, 2011 (US$m)
VC Investments by development stage (as % of US amount), by region, 200611
Number of rounds, by hotbed, 2011
0%
10%
20%
30%
40%
50%
60%
70%
80%
100%
2006 2007 2008 2009 2010 2011
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011
Start-up Product development
Pevenue (preproht) Prohtable
90%
Europe US China India
The globalization of venture capital is taking many forms, ranging
from global fund-raising and cross-border investment, to exits
on foreign stock exchanges or by foreign acquisition, to VC rms
opening ofces overseas and helping their portfolio companies
access markets in new regions.
VC rms in Brazil, India, Israel and the UK invest outside their
home countries. On the other hand, many more VC rms in
Canada (69%), France (82%), Germany (92%) and the US (49%)
invest internationally. Of those VC rms investing outside
their home countries, 57% plan to increase this activity during
the next ve years, while 35% plan to maintain their level of
international investment.
The distinct global VC trend toward international investment is
best illustrated by the example of US rms. Nearly half (49%)
of the US VC rms in the survey are currently investing outside
of the country. Of all US rms, 42% plan to increase their
international activities, 30% plan to maintain the current level,
3% plan a decrease and only 25% have no plans to invest outside
the US.
Large-tech-platform plays are becoming increasingly important,
with entire funds established around them. Special funds have
been established by top-tier VC rms in Silicon Valley to fund
applications development,
8
even in China.
9
Tencent, Chinas
highly protable multibillion-dollar revenue chat and gaming
service giant, is becoming a player on the world stage, starting
a massive wave of investments in a number of new strategic
platforms, from micro-blogging to online security, as well as in
existing businesses.
While US VC still dominates, Asia is starting
to surpass Greater Europe
The VC hotbeds around the world have seen some major shifts
in recent years. Most notably, China and India are beginning to
challenge Europe and Israel in investment amounts. However,
the US has continued to maintain an almost 70% share
throughout the past 10 years, with California, Boston and New
York City leading the scene.
The current pace of VC investment varies signicantly by
region. At the end of 2011, the US surpassed 2009 and 2010
8
For Java (Kleiner Perkins Caueld & Byers 1996 Java Fund, with US$100 million), for the
iPhone and iPad (Kleiner Perkins 2008 iFund, with US$100 million) and, most recently, for
Googles Android (DCMs 2011 A-Fund, with US$100 million).
levels and is almost even with 2008 amounts. Canada shows
an increase in the number of new investments for every year
since 2008; hence, the average investment size continues to
increase.
Europes number of investments is still in steady decline.
However, as in the US, total investment amount by year-end
surpassed the 2009 and 2010 levels but fell short of 2008s.
Israels VC investments still did not reach the 2010 level and are
a far cry from 2008s levels.
In Asia, China hit an all-time record in 2011, in both number
of investments and investment amount, and almost matches
Europes investment amount for the rst time ever. Given
Chinas new fund-raising record in 2011 and the favorable exit
environment, the investment pace will likely continue.
However, the median round size and valuations have risen to
historical heights, almost quadrupling the value of 200610,
which may dampen future returns. Indias investments are
slowly picking up and are at a modest level.
Western VC favors earlier-stage investment,
while Asia favors later stage
The major difference between the more mature VC markets and
the rapidly developing economies lies in the key development
stage of the investee companies. The global sweet spot of VC
investments is the revenue pre-prot category (50% to 60%
from 200610).
The more mature US and European VC markets consistently
invest a considerable amount in companies in the earlier
product development stage (pre-revenue). In contrast, China
and India generally prefer later-stage companies. China has a
unique pattern of pouring 30% to 50% of its invested capital into
protable companies (a level three to four times higher than
the US or European VC sectors). Meanwhile, Indias sweet spot
9
In China, Sina.com established the Twitter Developer Innovation Fund (in 2010, with
RMB200 million/US$30 million) for the micro-blogging industry, jointly with Sequoia Capital,
IDG Capital, Innovation Works, YunFeng Fund and Draper Fisher Jurvetson.
Global VC trends | Paradigm shifts in venture capital
Venture capitalists believe high returns generated by IPOs are
critical to providing superior returns to limited partners and
growth capital to developing portfolio companies.
13
The vast
majority of VCs around the world still look to the NASDAQ and
the New York Stock Exchange (NYSE) to provide a healthy and
vibrant market,
14
yet most US venture capitalists believe that the
current level of US IPO activity is too low.
On the other hand, a heavy dependence on IPO exits has its
own risk. The examples of Japan and Taiwan in the past two to
three years illustrate this point. In those countries, 70% to 90%
of exits came through public listings. With the public markets
now down and Japanese and Taiwanese major corporations
preferring to acquire more proven and mature companies, the
entire VC industry in these countries is in serious jeopardy, as
pipelines are lled with companies unable to exit. This will result
in poor returns for investors and, in turn, make any future fund-
raising very difcult.
In China, a similarly high proportion of exits are IPOs, yet its
new small and medium enterprise (SME) stock exchanges are
listing at global record highs.
An alternative exit route to IPOs and M&A, though generally
less lucrative, is the buyout of shares (held by VCs) by private
equity rms. While such transactions have occurred for many
years in the US and Europe at a low level, they have become
increasingly important in certain emerging markets, either
because investors want to exit earlier or the local IPO market
barely exists.
In Latin America and Eastern Europe, this route has become
especially important, as the local stock markets are not
developed to the point where young high-growth companies
nd a favorable IPO environment. The private equity route is
also becoming more common in Japan.
Exits in China continue to be a success story, although the often
overstated valuations of newly listed VC-backed companies
have come down substantially in 2011 to more realistic levels.
China had a total of 456 exits in 2011, including 41 trade sales
and 356 IPOs (68% of all exits).
15
The VC-backed company
share represents 48% of all public offerings. Domestic stock
exchanges account for the bulk of all Chinese IPOs (93%) and
VC-backed IPOs (87%) and boast impressive returns. The
13
NVCA June 2011 survey.
14
Globally, 87% of respondents selected NASDAQ as one of the three most promising stock
exchanges for venture-backed IPOs, while 39% selected the New York Stock Exchange (NYSE)
and 33% cited the Shanghai Stock Exchange. The AIM in London (26%) has substantially lost
ground over the past three years.
15
According to Zero2IPO.
centers on the revenue pre-prot stage, where 60% to 90% of
its capital was invested between 2009 and 2010.
The four stages of development start-up, product
development, revenue pre-prot and protable used in the VC
Investments by development stage charts provide an effective
way to compare VC investment patterns around the globe.
10
M&A remains key exit route in the West
The main exit route for VC-backed companies in Western
countries is acquisitions (M&A), representing 80% to 90% of all
exits. Fortunately, acquisition prices have stayed at reasonably
high levels, even during and after the nancial crisis. For
example, in the US for 2011, the ve biggest acquisitions
ranged from US$700 million to US$800 million. Prices should
remain fairly high and M&A activity can be expected to remain
constant or increase over the next year, given companies
current option to go public and the fact that the 15 largest
tech rms are holding US$300 billion in cash for acquisitions.
(Google alone acquired 48 companies in 2010 for US$1.8 billion
and 79 companies in 2011 for US$1.9 billion
11
.)
Similar acquisition trends in rapidly developing nations, notably
China, will see the emergence of new local leaders in search
of highly innovative technologies and solutions (e.g., Tencent,
Baidu, Alibaba, Sina, Huawei, ZTE). Such acquisitions help these
giants move quickly to stay ahead of erce competition, both
domestically and globally.
It is expected that India will follow suit over the next few years
as more large local companies want to add new services, such
as mobile and internet offerings acquisitions of new ventures
will provide quicker market deployment.
IPOs make up majority of exits in China
and India
In emerging markets (e.g., China, India, Brazil), IPOs represent
the bulk of exits, as they do in Japan, Korea and Taiwan.
Russia and Eastern European nations have yet to improve their
environments for public listings, so for the time being, Western
VC rms investing in these countries usually try to have
companies listed overseas.
12

10
Since the large majority of investments in emerging countries go into
entrepreneurial companies in the revenue stage (pre-prot or protable), most VCs and
entrepreneurs in emerging markets tend to use the terms early stage in an early-revenue
mode, followed by growth stage in late revenue pre-prot mode and late stage in the
protable phase. This differs from how the terms are used in the more mature VC markets.
11
Google SEC K-10 Filing (January 26, 2012).
12
However, the rst Russian VC-backed companies have tested the waters recently and listed
domestically for example, Russian Navigation Technologies debuted last year on the Moscow
Stock Exchange.
Bryan Pearce
Americas Venture Capital Advisory
Group Leader
Ernst & Young
Dr. Martin Haemmig
Adj. Professor CeTIM,
Germany/Netherlands (former
Senior Advisor on Venture Capital,
Stanford UniversitySPRIE)
Contributors:
New venture hotbeds
Limited partners will continue to
have a strong interest in funds
that focus on rapidly developing
and largely underserved markets.
Although the US will maintain
its leading position as the VC
nation for a long time to come, the
emerging growth nations will play
an increasing role, with less risky,
later-stage deals generally favored
at rst.
More than 50% of VC funds in
mature VC hotbeds are investing
outside their home countries,
with most of them maintaining
or increasing their allocations
abroad. New funding will come from
experienced angel investors as well
as increasingly active local corporate
investors.
To be sure, a signicant number of
investors and entrepreneurs will get
scars in the initial phase of these
new venture hotbeds. These trends
are part of the unprecedented
paradigm shift under way in the
global venture industry.
ChiNext was in the limelight with 124 exits and 58 VC IPOs. Some Chinese enterprises
went public on foreign exchanges 13 of them VC-backed taking place on the
NASDAQ, the NYSE and the Frankfurt Brse.
Angel investors become a growing funding source
New tax incentive programs for high net worth individuals (HNWI) are under way all
over the world (with the UK taking the boldest step in April 2011). These changes are
expected to increase the amount of angel investing. Even China and India are seeing
their rst angel groups established, thanks to a growing number of experienced
entrepreneurs who successfully exited their ventures.
Out of Silicon Valley have risen the oft-noted super angels, former executives from
success stories such as Google, Facebook, eBay and PayPal who have built successful
investment track records by investing personal capital in companies at the seed
stage.
16

But the rise of angel seed investing is driven not only by the existence of wealthy
former tech managers. The cost to start consumer web-focused businesses has
decreased dramatically in recent years, allowing companies to effectively prove
their products on far less initial capital. If these products are subsequently proven,
angels investments are often written up signicantly or acquired for an attractive
investment multiple.
Corporate venture capital in emerging markets expands
Corporate venturing has been practiced for more than 40 years. Corporate venture
capital (CVC) has historically accounted for 6% to 10% of all VC globally. During the
dot-com peak of 199900, when corporate venturing was often more motivated by
irrational exuberance than thoughtful strategy, its share of the VC pie grew. Since
then, CVC has returned to its historic share, with the exception of cleantech, where
CVC accounts for a slightly greater proportion of all venture capital (10% to 15%).
In China and India, big local corporations are beginning to challenge the local VCs
and their foreign CVC colleagues. The major players are new giants (e.g., Baidu,
Tencent, Alibaba, Huawei, ZTE, Tata, Wipro, Infosys, Reliance) and leaders in their
industries. They look for strategic access to new technologies, business models and
entrepreneurs in their highly competitive markets, balancing strategic with nancial
objectives. At the same time, a signicantly larger number of big local corporations
will invest directly into later-stage VC-backed companies for pure nancial returns
because their margins in manufacturing or business process outsourcing are eroding.
Western corporations have already done substantial CVC investment in these rapidly
growing nations for years; however, an even larger number are now preparing for it.
16
Several of these investors recently raised small institutional funds (typically less than US$75 million) to continue this strategy and
have invested in about 500 start-ups in Silicon Valley over the past 18 months.
They seek not only market access, but
innovation. These emerging markets
are an increasingly fertile ground for
innovation that may be applicable
globally or in other developing markets
with similar characteristics.
Global VC trends | Paradigm shifts in venture capital
1
Global annual VC investment
The US maintains a strong lead, with about 70% of global
investment in any given year, driven by Silicon Valley,
Massachusetts, Southern California and New York City. Canada,
Europe and Israel are stagnating or contracting, while India
shows modest growth patterns and China is close to surpassing
Europe as the No. 2 venture hub globally although most of
the investments in Asia will go into revenue-generating and
protable companies.
2
Annual VC investment by geography
The 2011 VC market in the US is recovering to the levels
seen just before the irrational dot-com spikes of 1999
and 2000. Levels are now almost back to where they were
before the 2008 nancial crisis. Europe saw a rapid decline in the
number of deals over the past decade but was able to maintain
total investment amounts thanks to larger deals. Continental
Europe is in danger of dropping below a critical size, which could
threaten the entire industry. Israel remains a typical early-stage
investment environment and needs to scale. However, its local
VC rms are struggling in the current fund-raising environment,
while foreign VC rms are moving earlier-stage and increasingly
competing head-on with their local VC peers. China has shown
rapid growth since 2005 and again reached record levels in
2011, almost surpassing the whole of Europe in investment
amount due to its late-stage investment focus.
Key global venture
insights (200511)
$25.0 $31.0 $34.3 $32.7 $24.1 $29.6 $32.6
2,618
2,854
3,070
2,981
2,714
3,033
3,209
2005 2006 2007 2008 2009 2010 2011
United States
(US$b)
Europe
(US$b)
1,484 1,415
1,669
1,412
1,186
1,253
1,012
$5.4 $6.3 $7.5 $7.6 $5.2 $6.7 $6.1
2005 2006 2007 2008 2009 2010 2011
Amount raised Number of rounds
VC investment by region, 2000-11
Global annual venture capital investment, 200511
$25.0
$5.4
$1.3
$1.1
$0.3
$0.6
2005
$31.0
$6.3
$1.5
$2.5
$0.6
$0.8
2006
$34.3
$7.5
$1.9
$3.8
$0.9
$0.9
2007
$32.7
$7.6
$2.1
$4.9
$1.7
$0.8
2008
$24.1
$5.2
$0.8
$2.7
$0.8
$0.5
2009
$29.6
$6.7
$1.8
$5.5
$1.1
$0.9
2010
$32.6
$6.1
$1.6
$5.9
$1.5
$1.0
2011
US Europe Israel* China India Canada
Totals:
(Rounds) 4,641 4,961 5,642 5,211 4,522 4,958 4,959
Totals:
(US$b) 33.9 42.7 49.4 49.8 34.2 45.6 48.7
*All-site Israeli companies
Note: chart scales vary for clarity
Source: Dow Jones VentureSource, 2012 (continued next page)
Israel*
(US$b)
China
(US$b)
$1.1 $2.5 $3.8 $4.9 $2.7 $5.5 $5.9
172
268
381
338
291
315 323
2005 2006 2007 2008 2009 2010 2011
$1.3 $1.5 $1.9 $2.1 $0.8 $1.8 $1.6
228
243
274
267
166
147 141
2005 2006 2007 2008 2009 2010 2011
Amount raised Number of rounds *All-site Israeli companies
3
Global VC-backed IPOs
The stock exchanges that list VC-backed companies in
the US, Europe and Israel are still recovering from the
nancial crisis. China has experienced phenomenal growth since
opening the SME Board and the high-growth stock exchange
ChiNext in Shenzhen. China surpassed the combined rest of the
world in 2010 both in number of VC-backed deals and in capital
raised in IPOs. Recent signs, however, indicate a cooldown
because the P/E ratios are not sustainable and the future
earnings by the listed companies have seemed inated in recent
quarters, leading investors to be cautious. Yet, even if a major
correction happens, returns may still be staggeringly good by
Western measures.
United States
(US$m)
Israel*
(US$m)
China
(US$m)
Europe
(US$m)
$119 $184 $122 $120 $7 $42 $24
4
5
8
8
2 2 2
2003 2004 2005 2006 2007 2008 2009 2010 2011
$1,454 $5,288 $2,454 $3,716 $7,532 $562 $904 $3,255 $5,358
23
70
46
57
81
8 8
46
45
2003 2004 2005 2006 2007 2008 2009 2010 2011
$442 $759 $4,893 $619 $4,448 $21,961 $15,328
7
12
24
11
45
141
97
2003 2004 2005 2006 2007 2008 2009 2010 2011
Pre -2005 data not
available
$126 $1,063 $2,590 $2,120 $1,185 $36 $170 $564 $990
9
37
72
97
46
9
3
18
14
2003 2004 2005 2006 2007 2008 2009 2010 2011
*All-site Israeli companies
Global VC-backed IPOs by region, 2003-11. Record high in China; increasing activity in US, Europe and Israel
Global VC trends | Key global venture insight
4
Global VC-backed M&A
The M&A market for VC-backed companies is still
very healthy in the Western world, thanks to large
companies big cash reserves and their drive for growth. This
is expected to continue, and as IPO activity for VC-backed
companies rises, median valuations and deal sizes will also
increase. China, on the other hand, has been focusing on the
public markets: more than 90% of its VC-backed exits in recent
years have been IPOs. But the new local corporate giants in
internet, mobile and telecommunications are likely to become
substantial acquirers of young companies in order to stay ahead
of the competition. This may fundamentally change the prices
and valuations of local companies going forward, making them
more attractive for entrepreneurs and their VC investors.
United States
(US$b)
Israel
(US$b)
China
(US$b)
Europe
(US$b)
$11 $28 $63
5
15
8 8
13
17
7
2003 2004 2005 2006 2007 2008 2009 2010 2011
N/S N/A N/S
$16 $10 $20 $50 $33 $50 $26 $30 $30
17
18 18
34
24
25
16
17
15
2003 2004 2005 2006 2007 2008 2009 2010 2011
$10 $14 $18 $21 $25 $22 $27 $23 $42
230
311 306
336
320
243
193 191
168
2003 2004 2005 2006 2007 2008 2009 2010 2011
$20 $30 $34 $47 $59 $32 $25 $40 $71
400
530
509
533
519
434
416
560
477
2003 2004 2005 2006 2007 2008 2009 2010 2011
Total transaction value Number of M&As
5
Median years from initial VC nancing
to IPO and M&A exit
While the holding period in the US and Europe from the
initial VC-nancing round to an IPO or M&A exit was extremely
brief during the dot-com boom in 199900, the pendulum
has swung to the other extreme, where 6 to 10 years has
become the norm in several industry sectors. This causes
major concerns for early-stage funds, which are commonly
experiencing 10-year holding periods. This means that as of
year two or three into a new fund, investment into start-up
stage companies in biotech, cleantech or other core technology
is less likely to take place, since the company exit would likely
come after the 10-year life of the fund had ended. In China and
India, the later-stage investments predominantly into more
mature, revenue-generating or protable companies lead
to rather short holding times. This may change, as there is
pressure to move investors into earlier stages due to the very
competitive late-stage environment.
VC-backed M&A by region, 200311
United States
Israel China
Europe
5.7
5.6 5.6
6.2
6.8
8.7
7.9
8.1
6.4
3.8
4.6
5.4
6.0
6.5
6.0
5.6
5.4
5.3
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
N/A
9.5
5.9
6.0
3.2
3.4
4.5
5.0
7.1
7.5
4.1
8.6
9.5
7.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
N/A
3.2
2.0
5.0
1.7
6.2
2.3
2.6
2.5
3.5
3.0
3.5
3.6
4.1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
N/A
3.4
4.1
5.5
5.8
6.3
8.3
3.8
8.9
3.2
4.2
4.9
6.0
6.5
6.7
5.6
5.7 5.7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
IPO M&A
6
Global median pre-money valuations
Uncertainty in the capital markets about the US
economic recovery and the situation in the Eurozone
has slowed the increase of the median pre-money valuation.
However, the situation may improve if large companies direct
VC-investment activities are strongly driven by strategic
considerations rather than purely nancial goals. Chinas
valuations will be driven largely by the P/E ratios on the new
local stock exchanges and by the rise of new larger funds
investing predominantly into late-stage deals. Unlike in Western
markets, Chinese corporate venture groups are not willing to
pay a premium when investing into companies for equity. They
argue that their value-add warrants a discount, not a premium.
United States
(US$m)
Israel
(US$m)
China
(US$m)
Europe
(US$m)
Median pre-money valuation
$10.1 $12.0 $15.0 $18.3 $17.2 $20.0 $19.2 $16.9 $21.3
2003 2004 2005 2006 2007 2008 2009 2010 2011
$4.3 $4.3 $4.9 $6.2 $7.1 $6.4 $5.6 $5.8 $6.0
2003 2004 2005 2006 2007 2008 2009 2010 2011
$8.0 $9.0 $9.7 $14.0 $5.5 $19.0 $11.0 $6.8 $5.6
2003 2004 2005 2006 2007 2008 2009 2010 2011
$13.3 $32.1 $38.9 $42.8 $46.3 $60.5
2003 2004 2005 2006 2007 2008 2009 2010 2011
Pre2006 data not
available
Time to M&A or IPO exit by region, 2002-211
(Median years to exit from initial VC investment)
Figure 6. Median pre-money valuation by region, 200311
Source: Dow Jones VentureSource
Global VC trends | Key global venture insight
Global VC hotbeds
United States
US VC investment, 200511
$25.0 $31.0 $34.3 $32.7 $24.1 $29.6 $32.6
2,618
2,854
3,070
2,981
2,714
3,033
3,209
2005 2006 2007 2008 2009 2010 2011
United States
US$b
VC trends
Outlook: US fund-raising continues
to be challenging
Despite strong deal ow, market volatility has had an
impact on the ability of all but the very best VC rms to raise
new funds. In 2011, total capital raised for US venture rms
reached US$32.6 billion, a 10% rise from the same period
a year ago. However, the number of rms that closed fell to
19 funds, a 38% drop from a year ago. (In 2010, the total US
VC investment was US$29.6 billion.) Overall, VC fund-raising
continues its almost decade-long decline. While current fund-
raising surpasses levels prior to the dot-com bubble years
(pre-2000), it has not yet returned to levels reached in the
200008 time frame.
Seven well-known VC funds raised most of the capital in
2011, as wary limited partners invested less and in only a few
VC rms. Top VCs were primarily early investors in areas such
as social media. And 2011 marked the fewest number of US
funds closed in 18 years, with just 135 and amount closed of
US$16.2 billion.
The US still maintains an approximately 70% share of the
global VC market, followed by the UK, Beijing and Shanghai.
Globally, the top four regions in the world with the most VC
activity were all in the US: Silicon Valley retains the lead by
far (US$12.6 billion, 977 rounds), followed by New England/
Boston (US$3.8 billion, 369 rounds), the New York City
metropolitan area (US $3 billion, 367 rounds) and then
Southern California (US$3.3 billion, 286 rounds). However, all
of these US hotbeds have experienced a decline in the number
of active investors.
Fund-raising is shifting toward later-stage
Many VCs show reluctance to invest in early-stage untested
companies. They are altering their investment objectives,
seeking greater exibility, growth equity opportunities
and later-stage deals. The average fund size substantially
increased in 2011, to US$140 million. Companies in the
expansion and later stage of development received most of the
funding during 2011. A total of US$18.7 billion in funding was
split between 1,103 later-stage companies.
Nevertheless, the seed/early-stage market is still active,
thanks largely to highly valued internet companies. The
relatively small amount of capital now required by start-ups
due to innovations such as cloud computing has lowered
operating costs dramatically, effectively allowing companies to
prove their products on far less initial capital. In 2011, 1,339
companies received a total of US$5.8 billion in rst-time
nancing (an increase of 7% in capital raised and a increase
of 19.5% in deal numbers, compared with the same period
in 2010).
Back to basics 16
United States VC trends
as social media businesses like Facebook and Groupon. They
are enabled by private exchanges such as SecondMarket (see
interview on page 18) and SharesPost, which allow investors
to trade the equity of private companies more efciently.
The exit environment remains fragile
Investors are moving further out the risk spectrum in
search of companies with strong growth stories. Since 1Q
2010, the VC-backed company exit environment has improved
for mature start-ups, driven by relatively stronger aftermarket
IPO performance and greater strength in M&A, divestitures
and emerging market growth. The improved exit environment
has raised VC funds hopes that they may nally be able
to cash in some investments at better valuations, thereby
reducing the pressure from impatient investors.
The VC-backed IPO market has been soft, but social media
companies have substantially improved volumes, stability and
aftermarket performance. Despite the ongoing uncertainty,
in 2011, 45 VC-backed IPOs valued at US$5.4 billion came
to market, a 64% increase in dollar value and a decrease in
the number of offerings compared with 2010 by one IPO.
The US VC-backed IPO market rst experienced a signicant
turnaround in 2010, when IPOs raised US$3.3 billion, or 267%
more than in the previous year.
Another exit route for VCs has been to sell portfolio
companies to PE rms. This path to liquidity is driven largely
by the relative weakness of the IPO market. PE rms can
create some liquidity for good companies and their investors.
US investment hotbeds
Hotbed 2010 investment
(US$m)
2011 investment
(US$m)
1 Silicon Valley $11,377 $12,592
2 New England $2,605 $3,818
3 Southern California $2,919 $3,327
4 New York Metro $2,420 $3,003
5 Texas $1,779 $1,015
6 Potomac $819 $1,224
Companies are staying private longer
Angel investors are nancing many of these early-stage
companies, particularly in digital- and mobile-related
investments. Subsequently, such angels investments are
often written up signicantly or acquired for an attractive
investment multiple. The proliferation of angel investors is
helping ll the void left by the consolidation of VC rms.
The super angel phenomenon involves former executives
from high-prole consumer internet companies who have
invested personal capital in companies at the seed stage.
Several of these investors recently raised small institutional
funds (typically less than US$75 million) to invest in about 500
start-ups in Silicon Valley over the past 18 months.
The average time a company remains private has roughly
doubled in recent years. As some highly successful companies
refrain from pursuing an IPO for much longer than used to
be the norm, this has led to the rise of private secondary
stock markets, which provide early investors and employees a
chance to sell out before an IPO. This has reduced the need to
go public because liquidity needs have been lessened.
The rise of more liquid private exchanges reects a big
change in nancing sources. For instance, the inated frothy
valuations in the tech market have been forming largely out
of sight in private markets. Professional investors are putting
billions in private capital into late-stage investments, such
Key US VC statistics
2009 2010 2011
Invested capital (US$m) $24,084 $29,595 $32,557
Investment rounds 2,714 3,033 3,209
Median round size (US$m) $5.0 $4.3 $5.0
Number of VC-backed IPOs 8 46 45
IPO capital raised (US$m) $904 $3,255 $5,358
Median time to IPO (years) 7.9 8.1 6.5
Number of VC-backed
M&As
416 560 477
Median M&A valuation
(US$m)
$25.0 $40.4 $70.7
Median time to M&A
(years)
5.6 5.4 5.3
However, the primary exit route remains the
trade sale
M&A makes up close to 90% of US VC-backed exits. With
many cash-rich US businesses focused on organic growth,
companies are expected to look to acquisitions and increase
their focus on divestitures as a way to maximize shareholder
value, raise capital or generate growth. M&A deal activity is
expected to moderately strengthen for 2012 and beyond.
Larger deals but fewer transactions characterize the M&A
market. In 2011, there were 477 VC-backed M&A deals
worth an aggregate US$47.8 billion, representing a 23% rise
in capital and an 15% decrease in deal numbers compared
with the same period in 2010. (In 2010, the venture-backed
M&A market in the US recorded its rst rise in both deal
numbers and value since the peaks of 2007, with 560 deals
generating $39.0 billion, almost 69% higher than in 2009.)
M&A valuations are quite strong and offer broad investor
participation, with capital efciency on par with the pre-
internet bubble period.
Driving the acquisitions momentum is the recognition
by large corporations that they cannot generate all of the
innovation they need internally, and that they need to partner
with VC rms and their portfolio companies to access external
innovation relevant to their businesses. In addition, with a
generally soft IPO market, valuations for many companies
are low, making acquisitions attractive to large cash-rich
corporations.
Corporate VC makes up nearly 3% of all capital being
committed to US start-ups, and 2011s total was just under
US$1 billion. Large companies are launching seed funds to
boost their bottom lines and scope possible acquisitions.
Corporate venturing units have an important role in acting as
in-house strategic advisors and helping portfolio companies
accelerate their businesses. The reduction in the number of
traditional VC rms has helped open new opportunities for
corporate venturing.
IT, health care and cleantech make up
half of all VC capital raised
With funding in various sectors and life-cycle stages, the
pace of US VC investment has been reasonable and deliberate,
contrary to popular perceptions.
The IT sector, especially software, saw an upswing. In
2011, software companies raised US$4.6 billion in 743
deals, a rise of 12% from 2010. Software companies,
which had plummeted in 2009, bounced back in 2010 with
US$4.1 billion in investments over 671 deals, a 21% rise in
capital from 2009.
Health care rebounded in 2011 with US$8.4 billion raised,
although the number of deals 738 represent a slight
decline from 2010. Many innovative venture-backed biotech
companies are being acquired by large incumbents.
Cleantech venture has slowed down. In 2011, US cleantech
with 297 energy companies received US$4.9 billion.
(Cleantech venture investment in the US had registered a
sharp upturn at the end of 2010, with total investment for
2010 reaching US$5.1 billion from 300 deals.) US venture
investment in 2011 continued to see large investments in the
solar and energy storage sectors.
Longer-run VC horizons are brightening
Longer-term trends suggest a positive direction for VC,
including more VC money funding start-ups, the proliferation
of angel investors, the fast growth of private secondary
markets, the emergence of new overseas investors and
growth opportunities in new and innovative segments such
as cleantech, cloud computing, social networks, wireless and
information security.
The VC universe continues to shrink as US institutional
investors focus on top performers or forego VC altogether.
However, the VC industrys continued long-term consolidation
is viewed as good for the industry, as it weeds out weaker
rms, reduces excess competition and improves returns.
Better returns will in turn attract more capital to venture funds
as the cyclical process continues.
Limited partners were asked for their prerequisites for
re-engaging with the VC industry as an asset class in our US
limited partner sentiment survey of 2010. Currently, all of
the prerequisites cited by limited partners are being exhibited
in current markets: 1) more successful exit track records by
VC rms, including both IPO and M&A activity; 2) continued
contraction of VC rms so as to weed out weaker rms; and
3) fewer dollars into VC funds, creating a focus on more
capital-efcient company investments and better returns for
limited partners.
Global VC hotbeds | Americas
Large US corporations are recognizing that they need
to partner with VC rms and their portfolio companies to
access external innovation relevant to their businesses.
Bryan Pearce, Americas VC Leader, Ernst & Young
Q&A
Back to basics 18
Lawrence Lenihan
Founder and Managing Director
FirstMark Capital
New York City
Bubbles pop, but theyre like forest res: in the
end, theyre healthy. This market is going to come
back stronger and much bigger 5 to 10 years
from now.
Ernst & Young: What is your perspective on the current VC
environment in the US?
Lawrence Lenihan: Nationally, right now were in a venture
bubble. Not so much A-round money, but lots of later-round
money. Theres too much money chasing the next Facebook.
Bubbles pop, of course, but theyre kind of like forest res: in
the end, theyre healthy. This market is going to come back
stronger. There will be something much bigger in terms of the
entrepreneurial market 5 to 10 years from now.
Ernst & Young: What sectors do you see as increasingly
active in VC in the US?
Lawrence Lenihan: I think a lot of people thought advertising
technology was over. Our belief is that its really in a third
inning. Were also going to see a lot more games. Games as
entertainment, content, engagement. We are also big, big
believers in data, and with that, analytics. You need very
sophisticated analytics to really drive key decision-making
across all industries.
Were also seeing a whole new development of security, from
the highest-level enterprise all the way down to the personal.
We also think that application technology for very specic
industry problems, such as nance, insurance, pharma and
health care, will do well. Retail is a gigantic opportunity, but it is
incredibly bubbly right now there are many investors chasing
this space, but most of them dont really know or appreciate the
industry.
Ernst & Young: What do you think about the prospects for
the exit environment over the next few months?
Lawrence Lenihan: There has been a massive appetite for
IPOs over the past 12 months. But whats going to happen 6,
12 months from now? I think these markets are no longer the
nancing vehicles for venture companies that they once were.
Companies need to be large, mature and have predictable
revenue streams that fund earnings and future development.
Companies with a longer outlook in terms of their development
will be slaughtered in the public markets because these markets
have such a short-term focus.
Nevertheless, everybody is still driving for that IPO were
doing it, too. Weve got a company that recently led for an IPO.
Were going to cross our ngers and hope that the markets hold
together for six months after its offering so we can exit in an
orderly manner. But in the end, we would much prefer to exit in
an M&A process. Its nice to get it all done at once and then you
dont have to worry about it.
Ernst & Young: Are you seeing corporates more willing now
than they were a year or so ago to do deals?
Lawrence Lenihan: Yes. Without a doubt. But that can change
on a dime in an uncertain environment.
Ernst & Young: Whether its national initiatives like Startup
America to provide funding for start-ups or other state
or local initiatives, will we see more government, wealthy
private individuals or large companies trying to play a
catalytic role for start-ups?
Lawrence Lenihan: Yes, I think were going to see it more, and I
also think it will end abruptly. I just dont think these incubators
and accelerators do much. The best thing they do is provide
community, a good central point where expertise can gather.
Ernst & Young: What do you think the optimal VC fund looks
like three to ve years out?
Lawrence Lenihan: After 15 years of doing this, I think venture
capital is the most unscalable business on the planet. You cant
just hire somebody and say, Hey, youd be a good investor.
You nd out over many years. So I think the perfect A-round
venture fund is small, a US$200 million to US$250 million fund.
Its four or ve partners. I think VC funds are going to be smaller
going forward, using more of the GPs own money, because new
companies need less money to gure it out and grow.
Ernst & Young: Do you see venture becoming more globally
focused in the US?
Lawrence Lenihan: Actually, I think its going to be increasingly
local. And concentrated. I think that, for example, New Yorks
gains have come at the expense of Boston.
Ernst & Young: Would you see start-ups, on the other hand,
going more global?
Lawrence Lenihan: Absolutely. And every company were
looking at, we talk about being global from the beginning. How
can your product be purchased anywhere? How do you service
your customers anywhere? For us, customer acquisition is the
most important determinant of success, and those customers
can be anywhere in the world.
United States
Q&A
Ernst & Young: What general trends are you seeing in
venture investing in the US?
Jeffrey Glass: Im seeing two major trends. The rst is a move
toward later-stage investing. Some rms that traditionally only
did early-stage investment have either switched to late-stage
or are employing a multistage approach. Some of these are
even investing in very late-stage, high-valuation, mezzanine
rounds. I think VCs have seen some spectacularly big valuations
created and are therefore less afraid to invest at a later stage.
Sometimes theyre even willing to enter at what used to be
considered untouchable valuations.
Also, many start-ups today require much less capital than they
used to, so I think some larger funds depending on how they
are structured are nding that it can be harder to compete for
early-stage opportunities. So they migrate to later stage, where
there is more need for the kinds of capital they are looking to
deploy.
The second trend is a massive proliferation of seed and
angel investing, particularly in digital- and mobile-related
investments. Here, again, the driver is the relatively small
amount of capital thats now required. In some cases, you can
put your infrastructure in the cloud and use open-source tools.
Ernst & Young: How do you see the exit environment
evolving right now?
Jeffrey Glass: Clearly, the last couple of years have seen some
improvement. In fact, the last two years have been the most
prolic for us, both in terms of number of exits and total dollar
returns. These have included IPOs, M&A, as well as a couple of
investments where larger private equity rms bought some of
our companies. This last is an interesting third path to liquidity
these days.
In 2008 and 2009, a lot of larger companies tightened their
belts. They did a nice job at it, too, creating record amounts
of cash on their balance sheets. But in the process, they cut
R&D. Then, in need of innovation and ush with cash, these
companies enabled a nice surge of strategic exits. This was
followed, at least for a little bit, by a wide-open IPO window
where public investors were looking for growth opportunities
and where a number of IPOs did quite well. My sense is that,
even though markets have been volatile lately, its a pretty good
time for exits, both IPO and M&A. We expect to be active over
the next year.
Ernst & Young: What trends are you seeing in the
relationships between start-ups and big corporations?
Jeffrey Glass: One thing were seeing a lot of in tech is
development partnerships: an early-stage software company
will develop its product by partnering with a larger corporation
and creating the initial version or building out the platform to t
the particular requirements of that customer. Im also seeing an
increase in foreign corporate activity as investor, as acquirer
and as customer.
Ernst & Young: You mentioned VC rms selling companies
to PE rms as a third path to liquidity. Do you see a trend
there?
Jeffrey Glass: The extent of it is largely driven by the weakness
of the IPO market. When there are good companies that have
been around for several years but the IPO market is weak, thats
a good time for PE to move in and create some liquidity for the
companies and their investors. Weve been seeing this recently
because, overall, the IPO market has not been strong. As long
as that continues, PE will be a signicant exit route for venture
investors.
Founders, of course, are still looking down the road toward that
IPO. But we always advise companies to focus on developing
their company, keep running their offense. You cant control the
vagaries of the market, so you need to focus on your company.
So if this handoff to a larger PE rm gives the young company
more time and cash to keep developing, its good for them.
Ernst & Young: What do you think the venture fund
landscape will look like ve years down the road in the US?
Jeffrey Glass: Its a cyclical process. Right now, certain sectors
that have done well are attracting too much funding. It creates
a highly competitive environment in which no start-up can build
a big, protable business, so there will be lower returns for
investors. When LPs are disappointed, theyll start pulling their
money, and the environment will be less competitive, leading to
better returns. Better returns will in turn attract more capital to
venture funds, and the cycle continues. This cycle is probably
the nature of the beast and what we can expect to see continue.
Its worth noting, though, that the top quartile of VC rms is
less prone to the ups and downs of this cycle.
Jeffrey Glass
Managing Director
Bain Capital Ventures
Boston
VCs have seen some spectacularly big
valuations created and are therefore less
afraid to invest at a later stage.
United States
Back to basics 20
Q&A
Ernst & Young: What was your inspiration for SecondMarket?
Barry Silbert: Our idea was to create a marketplace for the
many assets that are not traded on any exchange. There
are tens of trillions of dollars worth of these alternative
investments, including restricted stock, private company stock,
certain xed-income securities, bankruptcy claims and others.
Ernst & Young: As a market for private company stock, what
do you see as SecondMarkets role in the development of
young companies?
Barry Silbert: One important role is to provide them with
liquidity. But we also help them stay private longer, which
some of them want to do. I think eventually we will serve as an
alternative to going public at all.
Ernst & Young: When the IPO market improves, do you think
SecondMarket will be of less interest to these companies?
Barry Silbert: In truth, there has been a general decline in
the IPO market since 2000. Even before the nancial crisis,
a good year for IPOs had fewer than half the number seen in
the 80s and 90s. And the sizes of the companies are much
bigger, so that small companies are left to nd other sources of
funding. I dont think a pickup in the IPO cycle is going to alter
this more general trend. There needs to be a better capital
formation process to enable these small companies to develop
to even have the chance of going public. Thats the gap I want
SecondMarket to ll.
Another general trend that makes it attractive to be private is
the short-term focus of public investors. Forty years ago, the
average investor held public stock for ve years; today, its
2.8 months. As an entrepreneur, thats not the kind of market
I want to be a part of. Companies that trade on SecondMarket
get more control over who trades their stock and when, allowing
them to create conditions that favor the long-term investor.
Ernst & Young: What has been the reaction to SecondMarket
from the venture capital community?
Barry Silbert: At the start, they thought there would be no
need for this service because the IPO market would come
roaring back. They thought that at that point, only the bad
companies would list privately. Well, were now approaching
US$1 billion in transactions. Yet VCs have turned out to be big
supporters because were helping their portfolio companies
grow to the point where they can go public successfully.
Nowadays it can take 10 years for a company to go public. We
not only help the company raise capital, we also provide the VCs
a way to take a little off the table during that time, which they
can invest elsewhere and spread their risk.
Ernst & Young: What are your thoughts on some of the current
regulatory developments that may affect SecondMarket?
Barry Silbert: Currently, companies with 500 or more
shareholders have to publicly report their nancial results.
Right now, there is a bill before Congress to increase the cap to
1,000 while also excluding from the count current and former
employees (high net worth and institutional investors). This is
a very positive development. With companies taking longer to
go public, the 500-shareholder rule has prevented additional
employee hiring, recruiting, and has prevented acquisitions by
companies that didnt want to exceed the limit. So this change
could be very good for small companies.
Ernst & Young: How has the environment since the nancial
crisis affected SecondMarket?
Barry Silbert: Many people have been less comfortable
investing in the public markets. Trust has been damaged. And
if you think about how Wall Street works, it really makes most
of its money off of inefciency, taking advantage of a lack of
transparency to charge as much as possible. So its an industry
ripe for disruption. SecondMarket has been attractive to people
because it brings transparency in a central market. It has been
very exciting to see it embraced by the investment community.
Ernst & Young: What types of companies or sectors will you
be approaching about listing on SecondMarket?
Barry Silbert: We started with venture-backed companies,
but there are many other opportunities. One of our next
focuses is private community banks, which often have many
shareholders. There are people who want to invest locally,
and these banks already make a lot of information public
because of bank regulatory requirements. Also, there are many
multigenerational family-owned businesses that need liquidity
and could benet from listing on SecondMarket.
Ernst & Young: Going forward, how do you see the market for
venture capital changing?
Barry Silbert: I think VCs especially good VCs will always
be an important part of the capital formation process. They can
provide more capital than angel investors, and they provide
much more than just capital. SecondMarkets own venture
investors provided us with a great board member, mentor and
friend and thats incredibly important, especially for a rst-
time entrepreneur.
Barry Silbert
Founder and CEO, SecondMarket, New York City
SecondMarket connects buyers and sellers of a variety of illiquid assets and alternative investments. Over $950 million in
private company stock transactions have taken place on SecondMarket since the launch of the private company market
in April 2009. Silbert launched a market in private company shares in April 2009 starting with Facebook and this has
become the growth engine of its business. Other high-prole companies to trade on the market include LinkedIn and
Twitter. SecondMarket is also now the worlds largest broker of venture-backed private company shares.
United States
Q&A
Ernst & Young: What is your picture of the history of the VC
industry in Brazil?
Clovis Meurer: In Brazil, we can separate the VC history
into major phases: the early 1980s to 1995, 1995 to 2005,
and 2005 to the present. During the 1980s, we saw the rst
VC rms arise, characterized by many pioneering efforts,
challenges and a very unfavorable environment for long-term
investments, due to high ination and very high interest rates.
Ination had a remarkable impact on nominal return rates for
short-term investments, which could grow a lot in just one day.
Since 1995, the VC outlook for Brazil has been improving,
thanks to the currency plan known as the Real Plan, the
reduction of ination and the likelihood of lower interest
rates. Another important factor has been the privatization of
public enterprises. This has improved the prospects for small
businesses that could supply these large companies. Weve
also seen the rst regulations of VC funds from CVM (the
Brazilian SEC), as well as the emergence of several incubators.
In 2000, the Brazilian Venture Capital and Private Equity
Association (ABVCAP) was created, bringing together industry
players (managing directors, audit rms, lawyers, investors,
etc.). Increasingly, we noticed a more favorable environment
for new entrepreneurial companies that provided investment
opportunities and strengthened the VC and PE funds.
Finally, since 2005, we have seen a new generation of VC funds.
The Brazilian pension funds and other institutional investors
began to dedicate more resources to VC funds. In addition, the
Brazilian stock market was booming, with a lot of new IPOs and
a very good exit environment.
Ernst & Young: What opportunities does Brazil face now?
What are the main growth drivers?
Clovis Meurer: There are many factors contributing to
our growth: the appreciation of the currency, interest rate
reductions, the C and D share classes, huge infrastructure
projects, the government housing program, investment in the
oil and gas industry, the real estate boom and more.
Where there is growth, there are investment opportunities for
VC funds. The World Cup, the Olympics and all the logistics and
infrastructure that need to be developed for these events have
attracted more and more resources. Investors are monitoring
these needs and directing more investment to meet them.
Ernst & Young: Who are the main investors of venture capital
in Brazil?
Clovis Meurer: The major investments still come from local
investors, mostly pension funds, the BNDES (Brazilian National
Development Bank) and other institutional investors. There is
not yet a strong presence of foreign investors in the countrys
VC industry.
Ernst & Young: What are the main challenges to increasing
the investment in VC funds in Brazil?
Clovis Meurer: The global funds look everywhere, and to
choose to invest in Brazil they need to see more liquidity than
there is currently. Also, the exit opportunities, especially by
way of the local stock exchange, are still maturing. When
global investors evaluate the exit possibilities for Brazilian VC
investments, they opt for PE investments, where the largest
deals take place and there are more options for exiting. Most
foundations and international funds have very high standards
of investment, and the team dedication needed to create value
for a small company is usually the same as whats needed for
a large company. But the development of a new access market
for younger companies (the Bovespa Mais), the opening of
representative global funds in Brazil, and the investment
of corporate investors are tending to reverse this reality
and attract more venture capital to Brazil. One of the most
important exit options for venture investors is to sell to PE
rms. The heat of the Brazilian PE industry has expanded this
exit option and helps to make VC investing more attractive.
Ernst & Young: How has the average maturation period for
VC investments evolved recently?
Clovis Meurer: In Brazil, it tends to last about ve to seven
years, which is more than the global average. These longer
periods of maturation reduce the internal rate of return.
However, the average has been decreasing rapidly and should
reach international standards soon.
Clovis Meurer
Partner and Senior Executive
CRP Companhia de Participaes
Porto Alegre
When global investors evaluate the exit possibilities
for Brazilian VC investments, they opt for PE
investments, where the largest deals take place and
there are more options for exiting.
Brazil
China VC investment, 200511
$1.1 $2.5 $3.8 $4.9 $2.7 $5.5 $5.9
172
268
381
338
291
315
323
2005 2006 2007 2008 2009 2010 2011
China
(US$b)
VC trends
Outlook: VCs on pace to reach all-time
record in 2011
Chinas VC industry set new heights in 2011 in both number
of investments and investment amount. Due to its late-stage
investment focus, China will likely surpass Europe as the
second-largest venture hub globally by investment amount
by the end of 2012. Given Chinas new fund-raising record
in 2011 and the favorable exit environment, the investment
pace will likely continue. However, the median round size and
valuations have risen to historical heights, more than doubling
the value of 200609, which may dampen future returns.
The Government suppports VC by issuing policies in
201011 to stimulate the continued rapid growth of the
VC industry, more investment in the middle and western
regions of China and the emergence of high-value-added and
environment-friendly products in seven elds for VC investors,
namely energy conservation and environmental protection,
next-generation IT, biotech, advanced manufacturing,
alternative energy, innovative materials and new-energy-
powered vehicles. Thus, the IT and cleantech sectors are likely
to dominate VC activity in the years to come.
Strong fund-raising growth, especially pre-IPO
The VC industry has seen strong growth in 201011. In
2011, US$5.9 billion was raised in 323 rounds. (In 2010,
China saw US$5.5 billion in 315 rounds, exceeding the record
peak of US$3.8 billion in 381 rounds in 2007.) Furthermore,
2011 saw 73 new funds raise a record US$8.1 billion for
investments in Chinese VC-backed companies (13% more
than was raised in 2010). Twenty of the new funds raised
US$100 million or more.
Key growth drivers include Chinas high GDP growth (at
least ve times higher in 2010 than in the US and Europe),
a booming IPO market, high P/E multiples, strong investor
demand for shares in newly listed companies, a favorable
policy climate and a huge pipeline of strong private companies
looking to raise equity capital before an IPO.
China
VC nancing of pre-IPO, late-stage investments dominates
and continues to increase. Growth funds experienced a sharp
rise in 2010 as domestic equity investors much preferred pre-
IPO, revenue-generating or protable companies. Indeed, in
2011, revenue companies made up 94% of investment, while
pre-revenue companies accounted for just 6% of investment.
The soaring corporate valuations of A-share listed companies
and substantial ROIs of their IPOs attracted more and more
funds into pre-IPO projects. In 2011, the median pre-revenue
valuation jumped to US$60.5 million (up 30% from 2010,
when the median was just US$46.4 million, and up 354% from
2006, when the median was US$13.3 million).
Chinas valuations will be driven largely by the P/E ratios
on the new local stock exchanges and by the rise of new larger
funds investing predominantly into late-stage deals. Unlike in
Western markets, Chinese corporate venture groups are not
willing to pay a premium when investing into companies for
equity. They argue that their value-add warrants a discount,
not a premium.
Early-stage opportunities are growing as rising levels of
innovation within China assist the growth of early-stage rms.
Government-sponsored incubators, university R&D centers
and formal business angel groups are also springing up.
Furthermore, there is pressure to move investors into earlier
stages, due to the very competitive late-stage environment.
Key China VC statistics
2009 2010 2011
Investment rounds 291 315 323
IPO capital raised (US$m) $4,448 $21,961 $15,328
Median time to IPO (years) 2.3 2.6 2.5
Number of VC-backed M&As 13 17 7
Median M&A valuation (US$m) $27.6 $62.7 N/S
Median time to M&A (years) 3.5 3.6 4.1
Domestic VC industry expands rapidly
VC investment in China has expanded geographically,
beyond ercely competitive eastern China (including Beijing,
Shanghai, Guangdong, Fujian, Zhejiang and Jiangsu) into
new areas in central and western China, as investors seek
better opportunities and local governments offer preferential
policies, such as establishment of governmental guidance
funds. Currently, Beijing is the leading Chinese VC investment
hotbed, raising the most capital US$2.9 billion in 2011
followed by Shanghai, which raised US$1.3 billion.
The Chinese VC industry has been led by global brand name
investment funds that have established China-based funds
(e.g., The Carlyle Group, Sequoia Capital), but domestic VC
rms are emerging and growing much faster. In this period
of transition, the market continues to mature, and new legal
structures and commercial arrangements are emerging.
Consolidation of the VC industry is inevitable. The
abundance of VC money available around China has enhanced
the VC industrys boom and rapid development. However,
as the competition has grown ercer, some entrants may be
eliminated and an industry reshufe will be inevitable. Only
those VCs that have a strong, professional team for project
selection, cost control and risk management can survive. The
number of participants will increase severalfold, and so will
the scale of the industry. Many VC funds in China started with
reputable foreign limited partnerships. But limited partnership
composition is in transition now that there are funds set up
in local currency (renminbi, or RMB), which enjoy natural
advantages.
Many RMB funds operated by foreign institutions have been
launched. Strong local preferential policies in tax and foreign
currency exchange to foreign RMB funds from the Chinese
Government contributed (e.g., Blackstone Group, IDG Capital,
KPCB China, Sequoia Capital China, Qiming Venture Partners).
For most foreign institutions operating in the Chinese capital
markets, being subject to foreign-exchange capital account
controls is now a small price to pay for the often exorbitant
returns on investments.
Private capital is becoming increasingly important.
Although bank loans are difcult to obtain, start-ups still have
a number of alternatives to VC, including nancial leasing,
micro-funds, capital markets (e.g., IPO, bonds), private
placement, angel investors and debt nancing. As elsewhere
in the world, Chinese angel investors have become major
investors in early-stage start-ups. The competition has nudged
VCs toward later-stage, high-growth pre-IPO ventures.
Given Chinas new fund-raising record and favorable exit
environment, the investment pace will likely continue, but
unrealistic valuations may dampen future returns.
Lawrence Lau, China VC Leader, Ernst & Young
Global VC hotbeds | Asia
Back to basics 24
China VC trends
China investment hotbeds
(US$m)
2011 investment
(US$m)
1 Beijing $3,087 $2,860
2 Shanghai $816 $1,278
Highly active exit environment
The high-growth stock exchange ChiNext provides a much-
needed domestic exit route. Launched in 2009, ChiNext
enables Chinas portfolio companies to raise money, invest and
exit within the country.
IPOs make up more than 90% of all VC-backed exits in
China, reaching a record high. In 2011, China saw 456 exits,
including 356 IPOs (78% of all exits) and 41 trade sales.
1
Of
the IPOs, 171 (48%) were venture-backed companies. In 2011,
the VC-backed IPOs saw US$15.3 billion in capital raised from
these transactions.
2
The median number of years from initial
nancing to IPO is extremely short in China compared with the
West just 2.5 years in 2011.
Domestic stock exchanges are playing a big role in
supporting IPOs, accounting for 79% (281) of all VC-backed
Chinese IPOs. SMEB and ChiNext garnered 115 and 128
listings each. Shanghai Stock Exchange had 38 IPOs. From
a VC/PE-backed perspective, the 171 IPOs were backed by
2.61 rms on average.
2
And 75 IPOs of VC-backed Chinese
enterprises took place on foreign exchanges, namely NASDAQ,
NYSE and the Frankfurt Brse.
Chinas VC-backed M&A market rose sharply in 2010, both
in the number of announced deals and the amount of capital
raised, hitting an all-time high. There were 17 deals disclosed,
up 31% from 2009, and worth a total of US$6.091 billion,
up 392% from the prior year.
3
In 2011, the pace quickened
with 41 trade sales. For M&A exit, the median time from initial
nancing to M&A was just 4.1 years.
1
According to Zero2IPO, January 2012.
2
Zero2IPO, February 2012.
3
Ibid.
Corporate investors have become more active buyers in
recent years in China, contributing to the increase in M&A.
Going forward, the major acquirers of young companies will
likely include new Chinese corporate leaders in the internet,
mobile and telecommunications sector as they strive to
maintain their competitive edge. Additionally, with the
recent easing of regulatory barriers to market entry, foreign
companies looking to enter China have found existing Chinese
businesses to be attractive acquisition targets. Compared
with VC investors, these local and foreign corporate investors
are more focused on strategic returns new technologies
or market access but many also have a purely nancial
objective.
Q&A
Ernst & Young: What do you see as the key trends,
opportunities and challenges for the VC industry in China in
the next few years?
Gary Rieschel: The Chinese Government policy is focused on
increasing innovation, increasing consumption and improving
quality of life. Add to this that there is still a great amount of
wealth being created in China, and these are huge drivers of the
countrys venture capital activity.
In terms of opportunities, Qiming looks at three things. We look
at Chinas young, very social and internet-savvy consumers,
and in the areas of health care and the environment. Both areas
are a current source of social unrest, where the Government
recognizes a strong need and demand for change as the society
grows wealthier. For example, China is now the top place in the
world for the commercialization of most of whats happening in
cleantech worldwide. And thats going to continue for the next
10-plus years.
Ernst & Young: From a VC perspective, what roles do the
Governments 11th and 12th Five-Year Plans play?
Gary Rieschel: I think the Plans are becoming better at
achieving their objectives. We align ourselves with the Five-Year
Plan, not because it directly tells us where to invest, but it does
indicate with which companies and industries Government is
going to play favorites. The Plan is really Chinas attempt to
organize itself, to improve some of its own internal resource
allocations and to focus more of that state-owned capital, or it
wont achieve the innovation it desires.
Ernst & Young: Whats your outlook for early, pre-revenue-
stage VC activity in the next few years?
Gary Rieschel: I think youre going to see an increasing number
of rms, namely foreign funds and the angel market, try to do
earlier-stage venture investing in China because of the price
pressure, because of the uncertainty of the exit markets. The
entry price or valuation is very important.
Ten years ago, the Chinese angel market was virtually
nonexistent, but now it is rapidly evolving and highly aggressive,
which I think is very healthy for China. Weve even developed
super angels in China that not only are investing their own
money but raise institutional money, primarily from
foreign investors.
Ernst & Young: Exits in China in the last two years have been
predominantly IPO-driven. Will that continue, and is the
M&A market also going to eventually take off as a second
exit route?
Gary Rieschel: I think IPOs will continue to be a much higher
percentage of the exits in China than they are in, for example,
the US partly because of the drive of the Chinese CEOs to
be independent, and partly because the nancial markets
worldwide still have a pretty healthy appetite for high-quality
domestic Chinese companies.
That said, the markets are becoming increasingly volatile
and investors are becoming much more selective about what
can go public. The high percentage of IPOs includes Chinese
companies listing overseas but also domestic IPOs. The Chinese
Government has a very clear focus on increasing the number of
companies listed in China. It also has a ve-year goal of having
1,000 companies listed on the small, start-up-focused GEM
exchange.
As for M&A, its only in the last two years that weve seen
signicant M&A activity by domestic Chinese companies, such
as Tencent and Baidu, acquiring start-ups and other companies
to ll out their product or services portfolios. And I think you
will gradually see more and more companies being acquired for
just their technology or their particular product before they
are protable.
Ernst & Young: With all the local-currency, RMB funds that
have been created recently, in addition to the dollar funds, is
too much money being plowed into the system in China?
Gary Rieschel: Thus far, the RMB and dollar funds have
pursued generally different targets in the VC world. The PE
world I think is going to see far more head-to-head competition.
The VC world has been in internet technology, electronic
commerce, etc., and those companies have listed primarily
offshore, on NASDAQ. The RMB funds of later-stage deals will
have substantial competition from PE dollar funds.
It used to be that a good, protable company in China didnt
have a very attractive domestic alternative for listing. But the
government policy and the increasing coverage, the growing
sophistication of the nancial markets in China, the increasing
number of nancial instruments and mutual funds in China all
these things are bringing more liquidity into the market, which
makes domestic listing more attractive. I think the real route for
alternative nancing is at the very early stage. For technology
companies, thats still primarily foreign capital.
Gary Rieschel
Founder and Managing Director
Qiming Venture Partners
Shanghai
Youll see an increasing number of foreign funds
and angel investors do earlier-stage venture
investing because of the price pressure and
uncertainty of exit markets.
China
India VC investment, 200511
India
(US$b)
$0.3
$0.6 $0.9 $1.7 $0.8 $1.1 $1.5
28
66
97
106
83
103
155
2005 2006 2007 2008 2009 2010 2011
VC trends
Outlook: strong with continued growth
High VC investment levels are anticipated for the next few
years, with Indias 8% GDP growth rate, existing VC funds
making attractive exits and an increasingly active VC/angel
investor community seeding young companies. Overall, 2012
and 2013 should be exciting years for Indias VC investing
as new innovations and business models in areas such as
e-commerce, mobile applications, health care delivery, medical
devices and technology, nancial inclusion, clean technology
and IT are likely to drive most of the activity. The availability
of ample funds for India investments augurs well for the VC
industry in the next few years.
However, the growth capital venture space in India is
getting overcrowded. With about 400 VC funds in operation,
this glut has driven up valuations, prompting concerns by
many investors, although there is still plenty of room for early-
stage VC funds.
VC industry is healthy and active
VCs have been particularly lively since 2006, with the
industry just a little more than a decade old. In 2011,
US$1.5 billion was raised in 155 rounds, while in 2010,
US$1.1 billion was raised in 103 rounds. Recently, the country
has been primarily a growth-capital market, with a median
deal size of about US$5.5 million in 2011 and US$7.9 million
in 2010 across PE/VC investments, making it difcult to
distinguish between pure VC and PE investments in India. If VC
is dened as seed and early-stage funding, since 2008, India
has seen close to or above 100 deals each year.
India
VC deals make up 7% to 10% of the total annual PE/VC
deal value in India. At least 610 VC deals, worth more than
US$6.5 billion, have occurred since 2006. After the slowdown
due to the global nancial crisis, investment activity is again
picking up.
A hybrid strategy of growth and late-stage investments has
been adopted by many VC rms recently, expanding the eld
of businesses they can support and diversifying risk. The
smaller growth-capital check sizes in India have supported
this trend.
Key growth drivers include high GDP growth, a growing
middle class, a large and vibrant entrepreneurial ecosystem,
entrepreneurs and fund managers paying increased attention
on early-stage investments, and the emergence of a domestic
network of angel funds. Thus, both demand- and supply-side
factors should support healthy activity in the industry.
Bangalore remains the hotbed of the VC industry, but
activity is spreading across the country, especially to Mumbai,
Hyderabad and Chennai.
VC funds are trying to invest across
sectors that allow them to tap into the
rapid growth in domestic consumption.
Mayank Rastogi, India VC Leader, Ernst & Young
Key India VC statistics
2009 2010 2011
Invested capital (US$m) $812 $1,064 $1,500
Number of VC-backed IPOs 6 2 N/A
IPO capital raised (US$m) $532 $46 N/A
Median time to IPO (years) N/A 4.30 N/A
Median M&A valuation (US$m) N/S $62.9 N/S
IT and other domestic consumption
sectors prevail
The technology sector has led VC activity in India since the
advent of the PE/VC industry in India in the late 1990s, and
it still accounts for more than 50% of deal activity. VC activity
has focused on the internet and telecom-related businesses.
In the last couple of years, health care, nancial services and
cleantech have also been active.
Domestic consumption is a key theme. VC funds are closely
pursuing companies that are capitalizing on the proliferation of
wealth, a burgeoning middle class, greater nancial inclusion
and superior and differentiated health care delivery models.
Such trends are expected to continue, with VC funds trying
to invest across sectors that allow them to tap into the rapid
growth in domestic consumption.
Fund managers condence in India is apparent in their
willingness to seed and help manage new businesses in their
formative years. This is especially true for sectors that have
not seen much VC activity in the past, such as consumer
products, nancial services and logistics. This is a departure
from the conventional VC model of nd and fund.
Trade sales dominate exits
More protable exits of VC-backed companies have renewed
interest in venture investing in 2011, and we expect this trend
to continue for the foreseeable future. Corporate venturing
is playing a signicant role, as a growing number of big
businesses seek new products and technologies by investing in
and eventually acquiring start-ups.
Trade sales are almost 50% of VC fund exits. In 2010,
there were 17 VC-backed trade sales, with a median of
US$63 million each. In 2011, India saw ve trade exits and the
median time to exit grow to 4.0 from 3.5 in 2010.
IPOs and secondary sales to other PE/VC funds have
been few in number, making up not quite 20% of exits each.
In 2011, there were no VC-backed IPOs, while in 2010, there
were VC-backed IPOs worth a total of US$46 million. Thus,
exit preparedness is expected to account for a signicant part
of Indian fund managers time as they exit their 2005-08
vintage investments.
Indias investment hotbed
(US$m)
2011 investment
(US$m)
1 Bangalore $277 $364
Q&A
Back to basics 28 28
Ernst & Young: Whats your outlook for the Indian VC industry,
and what have been the key growth drivers?
Sudhir Sethi: We believe that from 2010 to 2015, total venture
investments will be US$10 billion. From 2004 to 2009, total
venture investments were US$3.3 billion; from 2004 to 2009,
total technology investment was US$2.4 billion. We expect this to
grow in the next ve years to approximately US$7.5 billion. This is
where the opportunity lies.
The number of VC exits is very good, the multiples on return on
technology investment have been excellent and, more importantly,
the majority of the exits were in valuations of US$100 million to
US$500 million.
From 2004 to 2010, there were 142 venture-based exits in India.
Out of those exits, 100 were technology companies, including
IT services, software products, business process outsourcing/
knowledge process outsourcing and the internet. Most
importantly, the average multiple on invested capital was 5.9, and
in non-technology, it was 3.3.
M&A made up 63% of exits, while 14% were through IPO. The rest
was secondary market offerings. On strategic sales, the average
multiple of invested capital was 6.5, and on secondary markets it
was 4.1.
The supply chain of risk capital investors and the ecosystem of
venture have matured signicantly in the last three years. We have
high net worth individuals, or super angels. We have institutional
angel funds between US$20 million and US$60 million. And the
majority of the angel investments are in pre-revenue companies.
In the completion ecosystem, we have more key players coming
into venture B and C rounds.
Ernst & Young: Have exits in India been mainly domestic
or international?
Sudhir Sethi: Foreign corporations made up half the M&A. The
exit multiple for foreign corporations was 7.6, while for Indian
corporations the multiple was 3.0. When we raise capital as a
technology fund today, we are in a US$7.5 billion market with over
100 exits in the last ve to six years and a 5.9 multiple on return
through M&A, secondary offerings and IPOs. I think thats a great
mix to have.
Ernst & Young: Of the technology deals between 2004 and
2010 leading to an IPO, what proportions were in the various
aspects of technology?
Sudhir Sethi: Out of the 100 deals, 22 were in software products.
The greatest opportunities are in digital consumers, software
products, medical devices, high-tech manufacturing, cleantech
and energy. These are some of the niche services for security,
business intelligence and analytics.
I think e-commerce is very visible because lots of capital is going
there, but there is more to technology investing than e-commerce
alone. There are software products, medical devices you will see
more medical device companies coming from India.
India is skipping the PC revolution and hopping onto the mobile
bandwagon with approximately 750 million mobile users. You will
see a lot of new mobile companies on the consumer side and some
on the enterprise side still riding this wave.
One challenge India faces today is the lack of local limited partners
investing in the rupee. More rupee investment would encourage
international LPs to invest more in the country.
Ernst & Young: Do you think technologies created to solve
emerging-market problems will be exported to other emerging
markets, or do you think it will be a smaller, venture-nanced
portion?
Sudhir Sethi: To build a global company, we believe that we need
a three-pronged approach to the three largest markets: the US,
India and China. If our companies are able to grow in these three
markets, then we believe they will be successful.
This three-pronged approach is especially important in India
because, unlike China, most Indian entrepreneurs are used
to being global entrepreneurs. They built global companies
themselves because in the past it was very difcult to build
companies only in India. Today, we can build a US$75 million to
US$100 million company in anywhere from four to six years.
Ernst & Young: In India, there are more than 110 incubators,
some university-related, some government-related and some
private, with about 1,600 companies. How does the Indian VC
industry engage with incubators?
Sudhir Sethi: I think the success rate through incubators could
be less than what we nd through angels. Thats the nature of
the business. We have engaged with incubators, but weve found
nothing so far.
Ernst & Young: What is your advice to entrepreneurs wanting to
form an international company?
Sudhir Sethi: You must be adequately capitalized. In the India
venture market, 60% of the companies in series A that were
funded for less than US$2 million failed. Also, you must be local.
Dont have Indian professionals heading up your US operations
hire locally.
Sudhir Sethi
Chairman and Managing Director
IDG Ventures India
Bangalore
To build a global company, we believe that we
need a three-pronged approach to the three
largest markets: the US, India and China.
India
Q&A
opportunities and challenges for the VC industry in Japan in
the next couple of years?
Toshihisa Adachi: Since 2008 or 2009, the Japanese VC
industry has been having a difcult time. Total investment
last year, for instance, was about one-third that of 2008. This
is chiey because of the nancial crisis, but its also due to
Japans depressed stock market. Portfolio companies cant
nd a good reason to go public given the markets weakness.
But the situation seems to be improving. We had only 22 IPOs
last year, but I expect we may have 30 or 40 next year and a
gradual increase for the next two or three years after that.
As for M&A, this has not been a main exit route, and while thats
changing, its changing slowly. Big companies still dont like to
acquire small, risky businesses. Theyre much more comfortable
in the corporate venture capital (CVC) role. CVC is a big part of
venture investment in Japan, and that will continue.
We need more success stories and a more innovative business
model, moving completely away from the legacy models. There
is a new generation of globally focused, digitally sophisticated
young entrepreneurs in their 20s that we need to rely on to
aggressively generate new business globally.
Ernst & Young: Is Japan trending more into early-stage
or more into late-stage investment, and how about your rm
in particular?
Toshihisa Adachi: Were continuing to focus on early-stage VC.
I know JAFCO and some others are trying to invest in the late-
stage, growth space. But I dont think there are enough good
opportunities to rely on that. It would be better to do both early-
and late-stage investment. When I talked with the President of
JAFCO recently, he indicated they are trying to increase early-
stage investment as well.
Ernst & Young: Is the angel industry going to be signicant
in the early stage?
Toshihisa Adachi: Theres almost no angel investment in Japan
because theres too much aversion to risk. That said, for the
past 12 months or so, I have seen many boutique VCs that are
focusing on start-ups and investing with just $100,000 or
$1 million and playing the role of angel, then we take over the
next stage.
Ernst & Young: What industry segments are most likely to
generate the venture-backed market leaders in the next two
to four years?
Toshihisa Adachi: I believe that information and
communication technology will be the major sector in ve
years time. And additionally, green technology. Health care
technology and services will be a growing area. Japan has
an aging population and is facing a decline in the number of
students, so we need to optimize our health care services to
handle this.
Ernst & Young: In the West, a VC investor typically takes the
lead and manages the entire investment on behalf of the
co-investors. Is it accurate to say that this leadership role
rarely exists in Japan?
Toshihisa Adachi: Yes. This has to do with Japans mentality
few want to take on the risk. Part of the problem is that
business-oriented VC investment managers are in short supply
in Japan. Many VCs still come from a nancial background,
but to take the lead, you need deep business and operational
experience.
Ernst & Young: What kind of advice do you give
entrepreneurs to help them grow their businesses?
Toshihisa Adachi: I tell them to act locally rst, but to design
their businesses based on the global market. Most of the IT
ventures in the last several years just focused on the local
market because we have a reasonably big market. But as
a result, they designed their systems and services only for
Japanese specications and were not able to reach
beyond Japan.
Ernst & Young: How do you view the role of government in
relation to the VC industry, now and in the next few years?
Toshihisa Adachi: For the time being, we need some money
from government, as in Korea, where the majority of the
money comes from the government. Its currently very hard
to raise new VC funds here, as the big banks have completely
stopped investment into young companies partly because of
Basel III. Second is the tax system. We need a more dynamic or
aggressive new tax system to support venture business.
Toshihisa Adachi
President and CEO
Itochu Technology Ventures
President of Japan VC Assoc.
Tokyo
I tell entrepreneurs to act locally rst, but to design
their businesses based on the global market.
Japan
Europe VC investment, 200511
$5.4 $6.3 $7.5 $7.6 $5.2 $6.7 $6.1
1,484
1,415
1,669
1,412
1,186
1,253
1,012
2005 2006 2007 2008 2009 2010 2011
Europe
VC trends
Outlook: resilience in the face of volatility
The European VC industry showed surprising robustness
in the face of highly volatile capital markets. In 2011 and
2010, European VC showed signs of a tentative recovery
after a particularly challenging 2009, although activity is still
signicantly below pre-crisis levels. However, equity will be the
principal source of capital for the next ve years, with more
companies looking to VC to nance growth. European VC and
PE rms hold a staggering US$138 billion of dry powder and
are seeking opportunities before their investment periods end.
Medium-term growth potential remains muted due to
sovereign bond tensions and a prolonged period of pressure on
small businesses, including tax increases and a very high cost
of capital. Because risk appetite is unlikely to return to pre-
2008 levels, the availability of external nance will continue to
be affected. Additionally, VC houses have to operate in a more
demanding regulatory environment with increased reporting
and capital obligations.
Fund-raising declines
Fund-raising declined as limited partners focused on top-
quartile performers with proven track records. 2011 saw the
worst volume since 2004, as European fund-raising fell 11%
year-over-year to US$2.9 billion for 41 funds (compared to
US$3.0 billion for 51 funds in 2010). In 2011, US$6.1 billion
was raised in 1,012 rounds. (At the same time, 2010 had 51
funds closed worth US$3.4 billion off the high of 2008, which
had 119 funds close worth US$10.5 billion. US$6.7 billion was
raised in 1,253 rounds.)
Europe
The average amount of capital raised per company is
increasing as bigger businesses are being built. Although
Europe has seen a decline in number of deals over the past
decade, it has maintained investment levels, which has led to
larger deal sizes overall. The median round size in 2011 was
US$2.7 million (up from US$2.6 million in 2010).
In 2010, the UK and Ireland continued to raise the most
capital in Europe, while France came in second, followed by
Germany and Switzerland. In 2011, the UK raised US$1.7
billion through 274 deals (down from US$2.6 billion raised
from 331 deals in 2010). France raised US$1 billion in 217
deals in 2011 (compared with US$1.1 billion of investment
raised through 266 deals in 2010).
Equity will be the principal source of capital for the next
ve years, with European VC and PE rms holding a
staggering US$138 billion of dry powder.
Julie Teigland, EMEA VC Leader, Ernst & Young
Key Europe VC statistics
2009 2010 2011
Investment rounds 1,186 1,253 1,012
IPO capital raised (US$m) $171.1 $563.9 $990.1
Median time to IPO (years) N/S 3.8 8.9
Median M&A valuation (US$m) $26.9 $23.1 $41.6
VCs skewing to early-stage deals
In 2010 and 2011, there has been continued consolidation
and specialization of funds, whether it be in stages of
nancing or industry, as erce competition for quality assets
persists.
Europe shows a preference for early-stage VC funds. Of
the 41 funds, 27 early-stage funds took US$2.5 billion of the
total US$3.0 billion raised in 2011. The 27 early-stage funds
tended to focus on higher-potential areas, such as cleantech.
Despite the early-stage preference, VCs are also channeling
signicant later-stage capital into their mature portfolio
companies to ready these businesses for exit.
Angel investors and private placements have been seeding
European companies, especially in IT subsectors. Fueled by
some high-prole company returns as well as the low start-up
costs and quick exits possible in IT, angels are lling the void
left by professional VC rms. As a result, VC investment is
being pushed out to an acceptable risk level for angel investors
(i.e., increasing the level of returns that a VC rm can afford
to request commensurate to the risk they take at a later
stage). Also contributing to the expansion of the angel investor
market are new governmental tax schemes in countries
such as the UK and France that encourage high net worth
individuals to invest in start-up companies.
Growing number of exit opportunities
The VC-backed IPO market saw a turnaround in 2010 and
2011, although the number of IPOs coming out of Europe
is still low. In 2011, Europe had 14 VC-backed IPOs with
total volume at US$990 million, well beyond 2010s full-
year volume. After a dearth of European VC-backed IPOs in
200809, Europe saw 18 venture-backed deals in 2010, a
surprisingly high number, and volumes also experienced a
healthy rebound, rising to US$564 million in 2010 (from a
mere US$170 million in 2009). The median time from initial
nancing to IPO jumped to 8.9 years in 2011, compared
with 3.8 years in 2010. For M&A exit in 2011, median time
is 5.7 years.
In 2011, European M&A transaction values rose:
US$42 billion was raised from 168 deals (down from the 2009
total of $7.5 billion in 193 deals). In 2010, US$23 billion was
raised from 191 deals.
Some attractive returns are expected for the VC industry
out of the growing number of exit deals, even though there
is recognition that earlier levels of returns will no longer be
achievable in the medium term.
Global VC hotbeds | Europe
Europe investment hotbeds
(US$m)
2011 investment
(US$m)
1 United Kingdom $2,587 $1,747
2 France $1,118 $1,026
3 Germany $817 $665
4 Switzerland $301 $347
Europe VC trends
Innovation spread across sectors
Health care attracted the greatest share of VC investment
in 2011. In 2010, health care attracted US$2.1 billion from
294 deals, up 24% from 2009, while in 2011, the sector
raised US$1.7 billion in 227 deals, down 22% from 2010. This
continued VC strength reects the industrys mix of capital
intensity and potentially high returns, as well as the aging
population and growing demand for drugs. Development time
for new products in health care has lengthened, causing VCs
to focus on later-stage opportunities that are further along
in the product approval process and changing the structure
of deals to be more milestone-based with smaller up-front
payments.
The IT sector capital level is rising again, although it is still
below its 2007 peak, as it was particularly affected by the
economic downturn. In 2011, the sector saw US$1.5 billion
in 270 deals, a slowdown from its pace of 2010, when the
industry received US$2.2 billion in capital, 61% more than the
2009 total (US$1.3 billion). European IT investors focused on
software.
The European cleantech sector slowed during 2011,
suffering from a lack of exits, with US$808 million from 113
deals, and investors holding back from injecting signicant
capital into this sector. For venture-funded cleantech
companies, all successful exits were M&A. Nonetheless,
cleantech has now rmly established itself as a new
investment category, and when cleantech company valuations
improve, the IPO route will reopen and VCs will increase their
investment. Offering high potential returns, the cleantech
sector is currently a focus of European policy-makers.
A region on the rise, Central and Eastern Europe (CEE)
emerged in 2009 as a destination for venture investment. In
2010, the CEE countries continued to attract a larger share
of capital the combined PE and VC fund-raising growth in
the CEE was 60%, far exceeding that of continental Europe
(13%), with a preponderance of VC fund-raising. In 1H 2011,
CEE saw US$123 million raised in 17 deals, while in 2010,
US$76 million was raised in the region through 23 deals.
Russia no longer accounts for the lions share of VC capital
invested in the CEE. Poland, the Czech Republic, Estonia,
Malta, Romania, Ukraine, Bulgaria and Hungary are also
increasingly attractive to venture capitalists.
Q&A
Simon Cook
Managing Partner, CEO
DFJ Esprit LLP
London
The key theme will continue to be
globalization of venture capital.
Ernst & Young: Whats your take on the current key trends in
the European venture capital industry?
Simon Cook: I think the key theme will continue to be
globalization of venture capital. A lot more US VCs are investing
in European deals, for instance. This began probably in 2007,
then stalled due to the nancial crisis, but in 2010 and 2011 its
picked up again. Many of the top US rms are now doing deals
in Europe. This is not so much early-stage but rather later-stage
investing.
In the other direction, you have very large investments by
European rms such as Index Ventures and Balderton Capital
that are investing probably half their time and money in the US.
I think this trend is because European venture investing doesnt
really exist as an asset class for LPs anymore.
Venture investing in Europe is primarily Silicon Valley-style in
that we are trying to build global businesses the best and
biggest opportunities we can nd.
Venture capital only really works by itself in certain regions
in the US, where there is the right ecosystem and the critical
mass such that successes can make up for the losses. In the
US outside those regions, there is as much desperation to nd
funding as there is in Munich or Manchester. Its good that
these other US regions can now get help in the form of 50-50
matching via the US Governments Startup America campaign.
This sort of government help is denitely useful.
I think we are investing in companies like we used to 10 years
ago, where the two main exit routes are M&A and an IPO on the
NASDAQ. NASDAQ has replaced AIM as the growth market of
choice in the global world. I see this trend continuing.
Here in Europe, I do not think we have capital efciency. We
do nearly as many small deals (under US$5 million) in Europe
as they do in the US, but in the US there is plenty of follow-on
capital, while in Europe there is very little.
If you look at the data so far this year, the average exit value
in the US is US$1.5 billion, while in Europe (including Russia)
its about US$1.2 billion yet both territories are putting
US$100 million to work in each company.
Ernst & Young: How is VC activity varying by sector today
in Europe?
Simon Cook: Whats interesting is that theres this myth that its
all about capital-efcient internet investing, that nobody does
semiconductors or life sciences. First of all, if you look at the
NASDAQ and US exit data last year, its pretty evenly matched.
And the same is true in Europe. The innovation is really quite
broadly spread.
Second, while in theory you can build an internet company
with little money, the ones that are successful raise a lot more
than any semiconductor company would raise. So I dont
particularly see capital efciency in the internet sector. Whats
true is that a shift to later-stage investing in Europe is driving
money into more obvious business models that are more rapidly
monetizable, such as internet and software, because theyve
already proven themselves.
Ernst & Young: What is the situation for angel investing
in Europe?
Simon Cook: Data suggests that where there are new tax
schemes encouraging high net worth individuals to invest in
young companies, the market has transformed. The data is
difcult to analyze, but it appears to me that angel investing
is huge in Europe and is related to tax schemes that are put in
place. For example, in the UK, I estimate the limited partnership
money invested in UK deals is probably 400 million a year,
while 1 billion a year goes into tax-driven angel investing. And
I think that with that change, particularly in the UK, that market
will dramatically expand.
Ernst & Young: Between now and, say, 2014 or 2015, what
do you see as potentially interesting sectors for venture
investment?
Simon Cook: Digital media looks strong. The Silicon Valley
model is probably more about distribution than it is about
content. Facebook, for example, is a distribution platform for
other peoples content. But in Europe, we have some incredibly
strong content businesses which I think will become more
valuable as time goes on (e.g., the Premier League, Formula 1,
UK television).
Cleantech really kicked off in Germany a decade ago. Its
taking longer and is maybe more dependent on infrastructure
decisions by government than some people expected. But
Europe is more likely to make those types of decisions than the
US, so Europe could be a favored region for cleantech activity.
But I think medical technology is the next big wave for
Europe. The people with the money are getting older, and
breakthroughs in genetics and other medical advances could
come quite rapidly now over the next 5 or 10 years.
Europe
Israel VC investment, 200511
Israel*
(US$b)
$1.3 $1.5 $1.9 $2.1 $0.8 $1.8 $1.6
228
243
274
267
166
147
141
2005 2006 2007 2008 2009 2010 2011
*Israeli all-site
Israel
Trends analysis
Outlook: difcult but improving
In 2011, Israels VC investment levels continued to
dwindle from their 2008 peak levels, and closing just below
2010 levels. Israel remains a typical early-stage investment
environment, and its local VC rms are currently struggling.
The ability of Israeli VC rms to raise follow-on funds in
2012 and 2013 will have a strong impact on the overall
performance and future of Israels high-tech sector, especially
start-ups.
However, cash-raising prospects may be improving, as
some funds can show a track record of protable investments.
Furthermore, as a result of the new government incentive
program to stimulate the local VC industry, domestic
institutional investors are expected to invest about
US$200 million in Israeli VC funds, mostly in 2012.
Fund-raising still a challenge
In 2011, 141 companies raised $1.6 billion from venture
investors, both local and foreign. In 2010, Israeli VC funds
were severely affected by the broad decline in the global
and US VC industry that began in 2008. In 2010, less than
US$1.8 billion was raised (compared with US$1.9 billion
in 2007), with just US$1.4 billion in reserve for future
investments. Fund-raising difculties caused many VC funds to
focus on late-stage investments seeking fast exits. While top
VC rms will raise more funds, many lower-tier rms will not.
US VC funds supplied most of the capital (75%) in 2011,
particularly for larger Israeli companies in transactions of
US$50 million or more. However, local VC funds have recently
been more active and did more than half of the deals. This
continues a decade-old trend of seed rounds in Israel followed
by later-stage rounds in the US, where larger investments
and higher valuations often with the establishment of US
operations might be achieved. The median pre-revenue
valuation in 2011 was just US$5.6 million.
VCs focus on later-stage investments
Later-stage deals prevailed in 2011, accounting for 46% of
deals and 69% of total capital raised. Israeli and foreign VCs
are raising special funds to target larger deals or even initiate
PE activity in Israel. This will be a crucial test for whether the
VC industry in Israel will support mature companies.
Israeli seed and rst-rounds accounted for 25% (33) of
deal numbers and 10% (US$138 million) of capital invested
in 2011, a signicant change from 2007, when early-stage
rounds claimed 50% of deal activity and 38% of capital raised.
(However, in light of the strong global internet market and
impressive Israeli media exits, more traditional funds are
taking risks and investing in seed media companies in order to
take part in the internet boom.)
This early-stage funding gap has led to the rise of super
angels and micro VC funds. These investors target seed-stage
companies that will use less capital to (often quickly) reach
substantial milestones. Super angels and micro VC funds play
an important role in the Israeli new investment environment,
enabling VCs to invest in more mature companies, which are
often relatively low-risk and have strong business models.
The ability of Israeli VC rms to raise follow-on funds
will have a strong impact on the performance and future
of Israels high-tech sector, especially start-ups.
Oren Bar-On, Israel VC Leader, Ernst & Young
Key Israel VC statistics
2009 2010 2011
Invested capital (US$m) $845 $1,845 $1,633
IPO capital raised (US$m) $7.4 $42.4 $24.2
Median time to IPO (years) N/S N/S N/S
Median M&A valuation (US$m) $25.5 $30.0 $30.0
Acquisitions are a more feasible exit
IPOs are difcult due to low valuations for Israeli companies,
especially in foreign markets. In 2011, just two IPOs worth
US$24 million were completed. In 2010, only two IPOs worth
US$42 million were completed, because companies receive
better valuations from acquirers. Although the Israeli high-
tech market has managed to give rise to strong and mature
companies in the last few years, few Israeli companies are
expected to go public in the next 12 months.
Acquisitions are seen as the most viable exit alternative for
Israeli companies and their investors. So far this year, volume
is strong: in 2011, acquisitions totaled US$885 million,
while all of 2010 saw US$1.4 billion and 2009 totaled
US$1.5 billion. The number of deals is close to last year, with
2011 seeing 15 acquisitions versus 2010s 17 acquisitions
and the previous ve-year average of 23.2. At the same time,
the median time from initial nancing to M&A exit was just
7 years in 2011, a substantial drop from the median of 9.5
years in 2010. As a result of extensive M&A activity, many
multinational new media companies now identify Israel as an
innovation center and maintain R&D facilities in the country.
IT raised the most capital
IT raised the most capital. The IT/software sector raised
the most capital, with 46 companies raising US$348 million,
followed by the cleantech sector, with eight companies raising
US$110 million.
The new media sector has developed quickly in recent years
and now boasts more than 700 companies whose offerings
span the range of new media possibilities, including content
creation, delivery and management, gaming, e-commerce,
iPhone and iPad applications, online advertising, search
engines and others. Innovative Israeli start-ups have answered
increased demands in the US market for new media solutions
for both content and infrastructure. In 2010, Israeli new media
companies were acquired by giant US companies such as
Yahoo!, AOL, Google, Facebook and others.
Israel investment
(US$m)
2011 investment
(US$m)
1 Israel $1,845 $1,633
Q&A
Q&A
Ernst & Young: What do you see as the current trends,
opportunities and challenges for Israels VC industry?
Daniel Cohen: First of all, we continue to see large US VCs
entering the market. These rms are focused on all stages
and create a competitive pressure on local rms. Second, the
incumbent VC rms are consolidating. More and more of the
traditional Israeli VC rms will not raise a new fund in the next
few years. Finally, we are seeing the emergence of local micro-
funds. These are small (US$15 millionUS$30 million), focused
funds that invest in seed-stage opportunities.
Second-tier funds have a lot of competition for the quality deals.
Consequently, were seeing a cycle effect, where the better
VCs get the better deals and have a better chance to open a
larger gap on the second-tier rms the same dynamic that
characterizes a mature VC industry anywhere. Capital-raising
for VC funds is very selective. In Israel, the top ve rms will
raise additional funds, but some second-tier funds will have a
hard time raising their next funds. The great shakeout is well
under way.
A local challenge and opportunity for the entire VC
ecosystem in Israel is to produce large, self-sustaining tech
companies. The leading local tech companies have been the
same for the past 15 to 20 years. Israel needs the next Check
Point or NICE Systems. If Israel is able to continue to produce
larger companies, this will boost local VC returns and enhance
the local ecosystem. Its clear that local entrepreneurs and
VCs understand this and are focused on staying with the good
companies until they are large enough to matter.
Ernst & Young: What is your outlook for the next 12 to 18
months in Israel, and what do you see as the emerging
trends?
Daniel Cohen: In the next 12 to 18 months, I expect to see
the larger local funds go out to raise new funds. The local
ecosystem needs these rms to raise substantial dollars, as it
cannot rely on the sole combination of micro funds and large
foreign investors. Based on some recent local success stories,
we expect that many local funds will be successful in raising
follow-on funds.
Ernst & Young: How has investment strategy been evolving
recently in Israels VC industry, and where do you see it
headed?
Daniel Cohen: In Israel, local VCs remain cautious. Theyre
writing smaller checks and focusing on capital-efcient start-
ups. The gap between the Israeli VC strategy and the US VC
strategy has pushed some entrepreneurs to search for capital
in Silicon Valley, hoping to get larger investments at better
valuations. If this trend continues, we will see a tendency
toward early-stage, seed investment being done in Israel but B-
or C-round investments occurring in the US. This would in fact
continue a trend weve seen over the past 10 years.
Ernst & Young: How do you view the current exit
environment in Israel?
Daniel Cohen: Its excellent and provides a real opportunity for
our portfolio companies. In Israel, the exits have always relied
mostly on NASDAQ IPOs and trade sales to large multinationals.
We expect 201112 to be excellent years for M&A, as many
large companies are very active in Israel. Regarding IPOs, we
still need to see larger companies emerge. The IPO window is
always open for Israeli companies, but its small-cap stocks.
Ernst & Young: Looking forward 5 to 10 years, what does the
optimal Israeli VC fund look like?
Daniel Cohen: I think it will be a US$100 millionUS$200 million
fund with a strong local presence complemented by excellent
global access in the US, Europe and the BRICs. And it will be
vertically focused, most likely a dedicated health care, tech or
cleantech fund. I would also expect it to be mostly early-stage,
with some growth investing, though the trend will be to become
stage-agnostic. As far as LP structure, I would like to see 40%
of LPs from the US, 30% from Europe, 30% from Asia and 20%
from Israel.
Ernst & Young: What advice are you commonly giving your
portfolio companies now about nancing?
Daniel Cohen: We push management to take one of two clear
nancing strategies. For companies that require substantial
investment in order to reach milestones (networking, tech
heavy, semiconductors), we advise them to create a consortium
at the seed stage and then use internal nancing until they
create real value. For SaaS (software as a service) and internet
companies, we help dene a clear nancial milestone based on
a small amount of money (typically less than US$2 million). We
believe that with such nancing, they can create enough value
to be able to raise a subsequent round at a higher valuation.
Daniel Cohen
General Partner
Gemini Israel Funds
Herzliya Pituach
We continue to see large US VCs entering the market,
focusing on all stages and creating competitive
pressure on local rms.
Israel
Q&A
opportunities and challenges for the VC industry in Russia
in the next few years?
Yan Ryazantsev: Our VC ecosystem is in an early stage of
development. Our VC rms are relatively inexperienced, and we
need more professional fund managers. But I think we will see
them come from foreign venture funds.
At the same time, the open market system is still new here,
so many sectors have untapped potential and are very
undervalued. There are plenty of potential investors in Russia
who see the untapped potential of Russias sectors and will be
increasingly interested in venture investing as the VC industry
matures. Another trend we will see at the same time is less
government involvement.
Ernst & Young: Tell us a bit about Russian Venture Company,
how the fund works, your investment focus, performance
and pipeline.
Yan Ryazantsev: RVC is a government fund of seven VC funds,
each one a public-private partnership. Most of these funds have
capital of about US$100 million, 51% from private investors
and 49% federal money. Our deal sizes are in the range of
US$2 million to US$5 million.
RVC also has a separate, purely supervisory role in a number
of regional public-private funds capitalized with a mix of
federal, regional and private money. These regional funds are
50% private capital and are managed by independent Russian
management companies. The total portfolio for these funds
is about 100 companies, most of which are pre-revenue. Our
charter capital is now more than US$1 billion.
If we look in the pipeline, we see a lot of innovation in energy
efciency, cleantech, biotech, laser technology, some oil and
gas, and of course IT, where we will see great companies in
sophisticated services like embedded system programming.
Consumer software is also demonstrating good growth.
We have a few big companies, such as Mail.ru and Yandex,
that have started to evaluate such companies and may be
good buyers in a few years. The Government is interested in
promoting corporate venture, so I think we will eventually see a
very big wave of growth in it.
Also, RVC has a plan to attract more foreign VC professionals
into Russia. We will be approaching foreign VC rms about
partnering with them to set up large Russia-focused funds
registered in their countries, perhaps 10 or 15 such funds.
These neednt be completely Russia-focused, but largely. We
think that if the funds are registered in the VC rms countries,
the idea will be more appealing to them.
Ernst & Young: What sort of exits have you seen, or do you
foresee, for your portfolio companies?
Yan Ryazantsev: The portfolio is very young, and so far we
havent had any exits. We had one IPO, last year, on the Moscow
Stock Exchange, but we remained majority owners. This was
Russian Navigation Technologies Company (RNT). We invested
slightly more than US$2 million two-and-a-half years ago, and
now they have more than 35% of the Russian market in eet
management. They raised about US$10 million in the IPO.
Ernst & Young: For venture-backed exits, is Russia more an
acquisition market or an IPO market?
Yan Ryazantsev: Its hard to predict, but it seems to me
that the Russian VC market will rst evolve to be mostly a
management buyout market.
Ernst & Young: I often hear that Russian entrepreneurs have
great technical abilities and are very smart and creative, but
lack Western-style business and management experience.
Do you agree with that?
Yan Ryazantsev: I absolutely do. And actually I think that the
Russian market is the next big thing because of this lack of
experience it keeps the valuations of start-ups low and masks
their great potential. This means that deals could be much more
protable, because these management issues can be addressed
and value will increase dramatically.
Ernst & Young: Are you pushing your entrepreneurs to think
more globally?
Yan Ryazantsev: Yes, we are pushing hard. This is part of
promoting the Russian VC industry, which is our mission. And
when we look at prospective portfolio companies and talk
to entrepreneurs, to the team, we ask them for their vision
of the globalization of their business. We want to hear their
intellectual property protection strategy, we ask them to make
multilingual websites, and we talk about and help them with
foreign market penetration. We also want a specialist in global
markets on their board, and we may soon adopt a rule requiring
this. Additionally, we require our portfolio companies to use
international accounting principles.
Yan Ryazantsev
Investment Expert
Russian Venture Company/OJSC
Moscow
The open market system is still new here, so
many sectors have untapped potential and are
very undervalued.
Russia
Global VC hot topics
Corporations are becoming the new
backers for entrepreneurs
Corporations are now playing a bigger role as backers of
entrepreneurs. This trend reects the declining numbers of
managers and fund-raising concentrated in a handful of top-
tier rms and current general upheaval in the venture capital
industry.
This is the rst time in corporate venturings 40-year, often
turbulent history when many funds are starting at the
beginning of an economic cycle, and when there was not a mass
exodus of corporate venturing groups during the recession.
Corporate venturing
1
(CV) programs and corporate venture
capital
2
(CVC) funds launched in 201011 show that investment
spans all sectors, sizes of parent organization and regions,
including emerging markets.
3
Moreover, the scale and scope
of fund-raising and historical investment data reveals distinct
investment trends among the new VC leaders.
4
1
Corporate venturing refers to a corporations reaching out for innovation beyond its in-house
R&D centers in order to in-source innovation by collaborating with universities, national
research labs, incubators, VC rms and entrepreneurial, innovative venture companies, or also
by acquiring such companies, either for accessing technology, market access or talents.
2
Corporate venture capital (CVC) in this context refers to corporations making direct
investments by taking minority equity stakes in often privately held innovative companies. The
rationale behind the equity stake can be strategic, nancial or both. The equity can be either
held directly after investment by a team sponsored by the corporation but managed either
within the group or more independently as a separate company, or held indirectly through a
commitment to a third-party venture capital fund. Corporate venturing typically includes larger
technology corporations, service companies and nancial institutions. In Japan, it also includes
trading houses investment units and banks venture capital divisions.
3
According to research on more than 110 corporate venturing programs and corporate venture
capital funds by Global Corporate Venturing.
4
Combined with original analysis by Dr. Martin Haemmig at Stanford University of data provided
by Dow Jones VentureSource.
Michael Dolbec
Managing Director
LG Innovation Ventures
San Francisco
Trends in global corporate venturing
Akhil Awasthi
Managing Partner
Tata Capital Growth Fund
Mumbai
Toshihisa Adachi
President and Chief Executive
Itochu Technology Ventures
Tokyo
CVs volatile history is rooted
in developed markets
Over the past 40 years, CVs direct and indirect investment in
entrepreneurs privately held companies has been punctuated
by extreme volatility. Historically, the vast majority of CV
programs have been managed on behalf of established
companies from developed markets in the US, Europe and
Japan.
From the 1960s to the dot-com bubble, most CV programs were
set up at the end of the economic cycle only to be closed a few
years later at the nadir of the downturn. But between 2000 and
2009, there were more than 350 corporate investors. More
than 40% of them operated for four years or longer (nearly
double the average time for those in the previous three waves
in the 1960s, 1970s and 1990s). Furthermore, there have been
very few CV program closures in the past two years.
But now, more CV is coming from
emerging markets
The current, or fourth, wave started around 2005. In the
last 18 months, as economies recover, it has been building
momentum, and were seeing an increasing number of CV
programs started by companies from emerging markets,
especially in Asia (excluding Japan). Of the 49 programs and
fund launches in 2010 by corporations, 17 came from US-based
businesses and 19 from emerging markets (the rest were from
Europe and Japan).
5
And in the rst 8 months of 2011, 20 of the
62 fund launches had come from US-based corporations and 16
from emerging markets.
5
Global Corporate Venturing.
VC investors interviewed
Silicon Valley pros are being hired
to staff CV groups
Many of these CV programs have been staffed with
professionals drawn from internal business units and M&A
divisions, as well as from VC rms, particularly for overseas
ofces. But theres now a trend in a different direction, bringing
in experienced Silicon Valley professionals. According to Mike
Dolbec, California-based head of CV for Korean conglomerate
LG Electronics, international corporations often mature
through three stages of the CVC model.
They begin by investing in someone elses fund. But they
eventually nd that this fails to yield the kind of insights,
perspective and deal ow theyre looking for. The next stage
is CVC 2.0, says Dolbec, where corporations set up a local
ofce in Silicon Valley but staffed with people whose careers
have been in the home company and recently transplanted
here. But because the innovation culture in Silicon Valley is so
relationship-driven, it is very difcult to penetrate.
Finally, 3.0 is now the current trend: hiring native Silicon Valley
people, especially experienced venture investors with previous
operating experience here, who have spent their careers in
the network of people that you need to know. The savviest
international corporations are now skipping the earlier CVC
stages and going straight to CVC 3.0.
CVC investment goals and fund sizes
are growing larger
CVC funds have become much larger in both emerging and
developed markets. The top 10 fund launches last year
committed US$2.5 billion, while for the 8 months of 2011, the
top 10 had US$5.4 billion in program expansions. In 2010, the
biggest fund was Korea Telecoms US$830 million fund, while
in 2011, the biggest has been nearly twice that size: US$1.5
billion, committed by Tencent, the China-based online services
provider, to its Industrial Collaboration Fund. These large funds
frequently aim for a hybrid of strategic and nancial returns
with teams specically focused on each.
Richard Hsu
Managing Director
Intel Capital China
Beijing
407 413 371 415 414 378 299
359 380
19% 18% 15% 16% 14% 13% 12%
12% 12%
2003 2004 2005 2006 2007 2008 2009 2010 2011
US
Europe
188 185 180 167
174
170
127
131
90
14% 14% 13% 13%
11%
13%
11%
11%
9%
2003 2004 2005 2006 2007 2008 2009 2010 2011
Israel*
32
24 26
36
24
18
11
18
12
30%
19% 20%
25%
13%
12%
10%
21%
17%
2003 2004 2005 2006 2007 2008 2009 2010 2011
China
23
28
30
27
27 21 55
15%
11%
8%
8%
9%
7% 17%
2003 2004 2005 2006 2007 2008 2009 2010 2011
N/A
% of CVC to total VC rounds Number of CVC rounds *Israel all-site
Corporate participation in nancing rounds, 200311 (Number of
rounds and percentage of all VC rounds)
The corporations are also able to attract other investors to
commit to their funds as a way of leveraging their money. Akhil
Awasthi is a managing partner at Tata Capital Growth Fund for
the India-based industrial conglomerate Tata. We bring to the
table a completely different execution from nancial investors.
We understand the businesses and the industrial sector as well
as the cyclical growth cycle, Awasthi says.
CV groups involvement in venture capital
deals has fallen
Historically, CVs role in supporting entrepreneurs has been
relatively limited. Given their often short-term lives and their
interest in deal-making at the end of an economic cycle, CV
units have had a reputation for being ckle and dumb money.
But with about 50 CV programs now having more than a
decades experience
6
and given these programs resilience
through the most recent economic downturn and their
increased investment since last year at the start of the latest
cycle this impression is starting to change.
Notwithstanding this trend, the proportion of investments
involving CV units as a percentage of all VC deals has broadly
fallen over the past ve years.
7
In the US, it has dropped 4% to
12%, and in Israel, it has dropped 7% to 17%. In Europe, it has
dropped from 13% to 9%. China was down in most years, having
started in 2006 with 11% of all VC deals being CV.
The US remains the biggest market for venture deals overall,
and this extends to CV. The US saw 1,830 deals involving CV
units in this ve-year period, while Europe saw fewer than half
as many (692), and Israel and China saw between 83 and 160 in
the same period.
8
6
Global Corporate Venturing.
7
According to analysis by Stanford Universitys Martin Haemmig using data supplied by Dow
Jones VentureSource.
8
Dow Jones VentureSource data.
Sarbvir Singh
Managing Director
Capital18
Noida-Delhi
Global VC hot topics | Global corporate venturing trends
Michael Jeon
Head of Europe
Samsung Venture Investment
Corporation
London
Ralf Schnell
Head
Siemens Venture Capital
Munich
But while CV units were involved in less than a quarter of deals,
some sectors were signicantly more active. In the cleantech
sector, CV units were involved in deals more often up to 10
percentage points more than the average across all sectors.
This higher involvement is usually seen as a consequence of
cleantechs higher capital expenditure requirements to achieve
product development milestones, revenues and protability,
as other investors have fewer resources to support capital-
intensive businesses for a long time.
CV groups now looking at early-stage
investments
In emerging markets, CV groups and other investors are
beginning to look more at early, less-competitive stages of
investment. Sarbvir Singh, head of the US$50 million Capital18
corporate venturing unit sponsored by India-based media group
Network18, says the unit was set up in 2007 during the height
of the previous venture capital bubble in India. We looked
early-stage because when we started in 2007, any company
with revenues and prots was being chased by at least ve
funds at what seemed like very high valuations, says Singh.
It made more sense to back seasoned professionals to build
organically, and this approach has paid off for us, he added.
Of the rst 10 portfolio companies at Capital18, 4 have been
incubated.
But if there is a trend toward more investing in start-ups, its
gradual. China is the most extreme, with 80% of the money
invested from the 36 CV deals last year going to protable
companies, and almost all the rest going to businesses
with revenues.
Corporate acquisitions are common in West,
rare in China
In developed markets, an increase in corporate acquisitions of
venture-backed companies as sources of innovation is expected.
Western corporations are increasingly expanding into the high-
growth regions with their own teams and investments, as well
as indirectly through limited partnerships managed by third
parties, occasionally buying up their portfolio companies.
9
India
and Japan are also seen as relatively open to foreign investment
and acquisitions. Yoshinori Ito, head of value-added investing
at Japan-based JAFCO (which made 106 venture deals in the
12 months ended in March 2011), says, In Japan, we expect
corporations to be an exit alternative so they can get access to
the technology, and because the Japanese IPO market is very
sluggish.
However, other emerging markets, in particular China, are seen
as having more constraints on overseas acquisitions or buoyant
stock markets for IPOs. CV investors in China seldom buy their
portfolio companies. In the ve-year period from 2006 to the
end of 2010, CV units acquired only between 1% and 6% of their
IT portfolio companies. Richard Hsu, China head of Intel Capital,
the CV unit of US-listed chip-maker Intel Corp., says: In China,
acquisition of venture-backed companies is less active, as the
attitude is build, not buy, and the IPO route is so much more
attractive for founders from a valuation perspective. Given the
abundance of opportunities, retention of management teams is
also an issue.
9
In January 2011 media group Pearson took a majority stake in TutorVista, having taken a 17.2%
stake in June 2009 as part of a US$12.5 million investment.
Pevenue (preproht) Prohtable
Prohtable
0
50
100
150
200
250
300
2006 2007 2008 2009 2010 2011
0
5
10
15
20
25
0
5
10
15
20
2006 2007 2008 2009 2010 2011
0
50
100
150
200
2006 2007 2008 2009 2010 2011
2006 2007 2008 2009 2010 2011
2006 2007 2008 2009 2010 2011
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011
2006 2007 2008 2009 2010 2011
Pevenue (preproht)
0%
20%
40%
60%
80%
100%
0%
20%
40%
60%
80%
100%
Number of CVC deals by stage of company development, by region, 200611
CVC investment amount by stage of company development
(as percent of total investment), by region, 200611
CV fund-raising is surging
Corporate venturing has been a little-noticed part of the
venture investment ecosystem, as judged by traditional
databases. However, the astonishingly large number of
fund-raisings in the past 18 months, especially in emerging
markets, at a time when traditional VC rms are often
struggling to raise commitments, indicates companies will
play a more important role in the future.
James Mawson
Founder and Editor
Global Corporate Venturing
London
Dr. Martin Haemmig
Germany/Netherlands, (former
Stanford University SPRIE)
Global VC hot topics | Global corporate venturing trends
Some CV groups are focusing more
on emerging markets
A number of CV groups are looking to invest more in emerging
markets than in developed markets. John Ball, founder and
Managing Partner of Steamboat Ventures, the venture capital
rm aligned with US-based media group Disney as its founding
limited partner, says: Steamboat on average looks to do a deal
per quarter in each of the US and China. However, in the future,
Steamboat could see an increase in its investment pace in China
given the fertile market conditions.
Corporations are nding that emerging markets can compete
strongly with developed markets on innovation, and not just
on macroeconomic growth or other factors. According to
Michael Jeon, head of Europe Investments at Samsung Venture
Investment Corporation, which manages the limited partner
commitments from many of the Korea-based conglomerates
subsidiaries, If you look at Korea, in the past, domestic start-
ups may not necessarily have had the best technology, as the
best tended to come from the US or Europe. But increasingly we
are nding that Korean companies are producing technologies
that are of very high quality. Silicon Valley companies ying
over to Korea face tougher competition than they once did.
CV groups help with international expansion
In the global competition for innovation, CV groups are keen to
help their domestic portfolio companies expand internationally
as a way of helping the home country more broadly. Toshihisa
Adachi, president and chief executive at Itochu Technology
Ventures, says: I am relying on young entrepreneurs to
aggressively make a new business globally. They have an eye
on the global market, and we are helping them to go to Silicon
Valley. Its time to change Japan Inc. from the legacy business
models to being much more innovative. And as for the CV units
themselves, they say the support of their parents help them
become global quickly.
Multinationals CV groups have a
competitive advantage
As the idea of encouraging entrepreneurs and innovation
globalizes, multinationals with large amounts of cash to invest
and an international network of ofces have an important
competitive advantage over more localized investment rms.
Ralf Schnell, head of Siemens Venture Capital, the corporate
venturing unit of Germany-based conglomerate Siemens AG,
sums up the new investment landscape: It is a huge advantage
to be part of a global multinational as countries beyond India,
China, the US and Europe become relevant entrepreneurial
societies. Brazil, Turkey, Russia and Eastern Europe are
establishing venture capital markets. The industry is global.
Authors
New digital media platforms
stimulate innovation
Takeshi Goto: Digital media has
merits that enable us to communicate
everywhere through the reach of the
internet, with higher quality, real time
and interactivity. This is not just a change
of signals from analog to digital, but it
enables an output of information to the
world at a lower cost and a higher quality
than broadcasting stations, which have
been monopolizing the radio waves, and
also enables us to collect information
from the world. With smartphones and
smart pads, a variety of content can be
distributed, such as music, video, books
and games.
Since digital media possesses an
expansive potential beyond the eld of
business or entertainment, it can be a
Treasure Island for start-up companies.
Rajan Mehra: The level of consumer
activity were seeing among our portfolio
companies is the highest weve ever seen
in the decade that I have been involved
with digital media. And this is with much
less marketing and ad spend than would
have been needed ve years ago, when
consumer activity was more of a push-
based proposition. We are very excited
about the entrepreneurial activity and
value creation we foresee over the next
ve to seven years.
Luis Gutierrez Roy: Companies
nowadays often do not need signicant
amounts of capital to roll out new
services. This represents a great
opportunity. The barriers to starting the
business or to entering through any given
market opportunity are much lower than
they used to be. For investors, this means
we can deploy in more companies and
can afford to add more resources than
just cash resources that may even be
more important.
Kai-Fu Lee: The innovation process has
gone from two years to three months.
With the digital media age and internet
software area, the project development
process is no longer one of locking
your door, developing for years and
coming out with the amazing product
and protecting it with IP. Instead, its
more about rolling it out there whenever
you have something users can tinker
with, something that can be altered and
improved. Because of this model, its
difcult to prevent others from copying
your idea, but its also not prudent for
an entrepreneur to try to dream up
ideas all by himself or herself because,
after all, getting that rst prototype
right is important, and if someone else
has done the work for you, at least you
should learn from it and then add your
alterations on top of that.
Simon Cook: When everything is digital,
one of the most amazing aspects is that
you can track usage from the point of
watching, say, a commercial through
to purchasing in the store. When you
have a complete chain of accountability
like that, you can move to much more
performance-based models. In the UK
and Europe, we have some investments
in performance-based marketing, which
is a step beyond display clicks to a system
where advertisers pay only if people
buy. Thats quite amazing not how
television or traditional media works.
I think we are going to see more and
more accountability built into the media
distribution channels that allows for more
and more interesting models.
Global digital
media trends
What are the hottest digital media trends and investment prospects
for VCs? We asked nine leading venture capitalists most from
emerging markets to share their thoughts.
Takeshi Goto
Executive Ofcer
SBI Investment Group
Tokyo
Dr. Kai-Fu Lee
Chairman and CEO
Innovation Works
Beijing
Simon Cook
Managing Partner and CEO
DFJ Esprit LLP
London
The fast growth of
mobile networks
David Zhang: In China, we are seeing
an explosive growth in terms of mobile
internet. Prior to the iOS and Android
platforms, many of the small teams had
a hard time getting funding. And even if
some VCs were interested, many were
not, as they were focused on achieving
big returns in a short time not likely
from a small team. But now, with iOS and
the Android platforms and the kind of
payment ecosystem surrounding them,
many of the small teams really generate
revenue and prot on their own, without
VC funding. They are able to grow slowly
and steadily and to a point where they
are actually more healthy and appealing
to a venture investor. Overall, I think
this is a very good thing and that mobile
internet is a big trend.
Kai-Fu Lee: We believed two years
ago that Android would win in China,
that it was a trend. We favored Android
applications related to infrastructure,
the operating system, advertising,
analytical tools, PC synchronization, the
application store, download assistants
and the like. The second wave, starting
about a year ago, was gaming and social,
where we primarily invested over the last
12 months.
Rajan Mehra: India will be a mobile
internet market. India so far has only
50 million installed desktops in a country
of 1.2 billion people. This is a very small
percentage of the total population
accessing the internet by desktop.
Growth will be driven primarily by other
devices, especially mobile handsets.
There is currently an installed base of
more than 500 million handsets, few of
them smartphones with internet access,
and the transition to smartphones
is occurring rapidly. The cost of
smartphones is falling fast, and tablet-like
devices will soon be available for US$100
to US$200 in India, a price point that we
think will make them widely available and
fundamentally impact activity.
William Saito: In Japan, one big change
recently is that suddenly Japan-made
cell phones are not the majority. The
sales leaders include Apple, Samsung
and others from outside Japan. And
so the vertical orientation that used to
be controlled by DoCoMo, the national
carrier, is now completely leveled and
people choose their service more on the
basis of handset than on carrier.
From a Japanese perspective, the
distribution channels for smartphone
apps were so locked up tight that it was
very difcult even to get the time of
day. But now its a level playing eld,
and an app store really makes it easy for
ventures and entrepreneurs to get into
this virtual market space. Were even
seeing a lot of these companies now
venturing into the international space
and getting quite a bit of traction.
Michael Nicklas: Around 80% of mobiles
in Brazil are prepaid. Until very recently,
data or internet could not be accessed
via prepaid mobile services, regardless
of the device. Still, the adoption of
smartphones in Brazil has been massive,
not so much for their data capacity,
but rather because they can be used
for watching open TV channels (which
are still the most relevant media in
Brazil) and because they are multi-chip
(therefore allowing users to benet
from free services offered by different
operators).
The widespread penetration of
smartphones has actually prompted
mobile phone operators into offering
on-demand 3G access to prepaid users.
Mobile browsing is quickly becoming
a habit, and this is starting to change
the mobile use in the Brazilian market
signicantly.
Digital media meets local
and global demand
David Zhang: Increasingly, Chinese
companies are becoming more
international. Many of the mobile gaming
companies now are moving out of
China and reaching into Southeast Asia,
Europe, Germany, even the US, because
the Facebook platform is very universal,
very international. And they are able to
grow very rapidly this way. Secondly, a lot
of these applications that are developed
for or are also leveraging the iPhone and
Android platforms now are becoming
more international.
Rajan Mehra
Managing Director
Nirvana Venture Advisors
Mumbai
Sumant Mandal
Managing Director
Clearstone Venture Partners
Mumbai
Luis Gutierrez Roy
Managing Partner
Telegraph Hill Group
San Francisco
Global VC hot topics | Global digital media trends
Smart and mobile
Mobile internet is nally becoming
a reality, and for many users,
especially in rapidly developing
economies, the rst time they
use the internet will be through a
mobile device. Five billion mobile
handsets are rapidly turning into
smartphones and tablets. The
Android mobile operating system
currently powers more than 100
million gadgets and is adding
more than 400,000 a day, yet
it was virtually unheard of two
years ago.
is now accessible like never before. Thus,
local, point-of-presence businesses
need to gure out not only how they will
manage their relationships with their
customers in the physical world, when a
potential customer is physically visiting a
store, but also in the virtual environment.
Even when a potential customer is
physically inside a store, that person
can be reached virtually through their
smartphone.
Social networking and
commerce intersect
Sumant Mandal: Social networking is
important because it personalizes the
web, adding information about how
people live. This makes it much more
engaging. Facebook is amazing because
it can put everything you do on the
internet into a social framework.
No one has been able to crack commerce
using the social network framework yet.
But I dont think one should discount it
just because it hasnt been done. It is
a very interesting business, because it
allows someone to pay for a lead knowing
exactly how much they can make from
that customer.
In the context of social networking
and commerce, I think that the two will
blend where your social network, your
social graph, your social interest will
become a guide toward your purchasing,
consumption and taste intentions. We
have invested in, and I have been on the
board of, many of these companies that
try to do social shopping or try to create
a way where your social information
gives businesses more targeting
information. Its still early, but it hasnt
worked yet.
William Saito: The app store has really
turned things upside down in Japan. I
used to complain that a lot of the venture
and entrepreneurial spirit in Japan
was local because it was very hard to
get outside the market for a number
of reasons. But the app stores of both
Android and iPhone are allowing many
Japanese ventures to make signicant
progress selling their products overseas.
Sumant Mandal: I think the most
exciting companies, the most exciting
investments, the most exciting products
are coming out of Europe and the BRICs.
Its no longer a US-centric market. You
can look almost anywhere on the globe
and see innovative new products and
ideas coming out that appeal to a global
market.
The virtual network world and the
physical world have merged, and thats a
huge investing theme. This virtual market
Emerging markets
Just over 10 years ago, internet
usage in emerging markets was
almost nonexistent. China, for
example, had only 10 million
internet users in 2000. Today,
China has close to 440 million
users. It is estimated that the
number of users in China, India
and Brazil combined will exceed
1 billion by 2015. The evolution
of local markets will be very
different from how it is today, and
the competitive landscape will
be a ght between global digital
media conglomerates, local digital
players and ofine companies.
What has worked is the blending of the
social graph with games. Technology
gives you a way of interacting with your
social network by playing games, which
is something I think most human beings
are naturally wired to do. For Facebook,
I would say games account for perhaps
two-thirds of their revenue. I think we are
going to see more of this blending of the
social graph with entertainment in the
form of competition within ones social
group.
Takeshi Goto: The past decade was,
without doubt, the age of Google. Google
offered various sorts of information
from around the world and created a
revolutionary environment through its
sophisticated search technology.
Google was splendid in text information,
and advertisements connected
with searches through complicated
algorithmic logic. But what about the
digital media? Digital media also contains
music and movies, not just restricted
text information. Its not easy to search
music and videos, although it has been
tried experimentally, for example, by
adding metadata. It may be said that it
is impossible to search perfectly. Music
and videos cannot be dealt with by logic.
They contain feeling, which cannot be
quantied. This means that it is beyond
Googles eld.
Facebook is a platform whose core is
the social graph, the users online
relationships, which reect their real
personal relationships. It has 750 million
users. Using the like button, you can
say I like it! to contents uploaded by
your friend. This is not logic, but feeling.
Since digital media appeals to your
feeling, it is driven more by social media.
William Saito
President and CEO
InTecur, K.K.
Tokyo
David Zhang
Founding Managing Partner
Matrix Partners China
Beijing
Dr. Martin Haemmig
Germany/Netherlands, (former
Stanford University SPRIE)
Anand Sunderji
Partner
Perpetual Value Partners
The vast potential of digital
e-commerce
David Zhang: There are already a
number of e-commerce companies in
China, both private and public, with
values exceeding US$5 billion. And I think
there will be many more going forward.
We have been investing in e-commerce
companies, and they are making very
healthy margins. We are really seeing an
online consumption explosion in China.
Rajan Mehra: We believe that if you are
going to invest in the Indian consumer,
your choices are to play the physical-
store retailers or the digitization of the
consumer. We think the latter is more
asset-efcient, and that as a percentage
of total share of wallet it will form a
meaningful share for Indian consumers.
Also, given the high cost of real estate
in India and given the fairly distributed
audience bases who tend to be in very
remote geographies, there is a fantastic
opportunity for e-commerce companies
that provide a variety of choice and price
to people who often dont have much
access. We think e-commerce will be
big, and we think it will be run by local
companies.
Platform potential in the East
Takeshi Goto: Setting up signicant
search, social media or e-commerce
platforms, and winning users, requires
a lot of capital and know-how. Western
companies already in the game have
overwhelming amounts of capital and
expertise. We expect that Western
platforms will generally succeed over
the local competition in the East, except
in countries that, like China, have strict
regulations that create hurdles for
foreign companies. In Japan, where such
hurdles do not exist, Facebook is rapidly
catching up to mixi, and Twitter is a
runaway success.
A platform is a relay station that content
providers use to deliver content to users,
and the operator of a platform is called
a platformer. The most important
function of a platformer is to attract a lot
of users (i.e., customers for the content).
Platformers can maintain stable prots
if they succeed, and thus they are
attractive investments. On the other
hand, there is a large cost in acquiring
members, so a great deal of money is
needed in the early phase. This makes it
very difcult to launch a new platform.
In Japan, Pixiv a social networking site
where you can share pictures, which
users draw in the image of an anime/
cartoon character is popular. We target
platforms that, like Pixiv, are focused on
a niche and show potential. Its important
that the platform is successfully
gathering quality users.
Content matters
Takeshi Goto: When the internet became
popular in Japan, illegal downloads were
an issue in the Japanese music industry.
There were people who did not want to
pay for invisible music data, though they
did pay for packaged visible CDs. Today,
Japan has payment platforms (such as
the iTunes Store), and digital content
sales in the music market have expanded
to half the size of those of packaged CDs.
Ten years later, China will experience
the same change that Japan is now
experiencing. Perhaps it will take them
less time. Currently, there is a regional
gap caused by differences of economic
scale and the penetration level of IT, but
these problems will be solved by time.
Therefore, there is great potential in
China for content sales, considering the
population and the popularity of digital
devices among a growing middle class.
Simon Cook: The latest successful
models are more about distribution
than content. Facebook, for example,
is a distribution platform for content
800 million people or more. But content
itself is a valuable area. Social game
developers, such as Playsh and Zynga,
have had a lot of success recently. But
other content opportunities deserve
attention.
In Europe, we have some incredibly
strong content businesses, which I think
will become more valuable as time goes
on. For instance, Premier League soccer
and Formula 1 are two digital content
businesses with hundreds of millions of
people who participate in every event
around the world. In addition, a lot of the
television formats in the US come out
of the UK. Entertainment content is not
your traditional venture investment, but I
think theres good, long-term value there.
We invested in LOVEFiLM, which is the
Netix of Europe, but now there are over
40 different service providers in the UK
from which you can get movies online.
Its the content that makes a difference,
and it may be where some of the best
investments lie in the future.
Small pieces, big prots
Takeshi Goto: Digital media is displayed
on various terminals, ranging from
computers and TVs to smartphones
and tablets. Shipment volume will
increase, as digital media is expanding.
A single model of iPhone sells more than
100 million units, so a huge prot may
be earned by providing even a small part
of the technology. We believe there is
still plenty of room for improvement in
technologies, such as touch panels, liquid
crystal displays and batteries, so we will
focus on companies that have prominent
element technologies in this eld.
Moderators
Global VC hot topics | Global digital media trends
United States
1,650
1,779
1,615
1,433
1,236
1,404
1,205 886
1,877
3,865
102
152
237
46
7,397
3,788
9,136
1,666
2,627 1,723
923
1,402
367
4,852
1,168
1,783
2,002
1,153
2005 2006 2007 2008 2009 2010 2011
4,274
5,142
6,174
4,870
4,121 3,930
3,917
886 2,106 1,223
6
1,217
1,085
506
7,397
7,359
7,513
2,481
7,846
4,610
5,665
6,788
10,953
12,195
6,832
7,617
12,242
21,471
2005 2006 2007 2008 2009 2010 2011
Europe
Venture IPOs Follow-on Other
Innovation capital at risk?
The current nancing environment raises serious concerns
about the future ability of biotech to play a major role in the
life sciences innovation process. Recent results have fueled
new optimism about the future development of the biotech
sector. However, a closer look behind the capital numbers tells a
somewhat different story.
An overall analysis of the nancing situation in the global
biotech industry indicates that biotech investment began
to return to pre-crisis levels starting in 2010. At the same
time, the global biotech sector achieved a turnaround in R&D
investments after serious concerns due to crisis-driven cost-
saving initiatives.
The apparent recovery of the nancing situation for the biotech
sector in 2010 consists mostly of large debt nancings by a few
mature companies that took advantage of low interest rates.
This trend was particularly evident in the US, but it has been
less pronounced in Europe, where the industry is less mature
and where recovery has yet to approach pre-crisis levels.
In fact, innovation capital in the biotech industry declined by
almost 20% from 2009 to 2010. And 2011 does not show any
improvement but rather a solidication of this trend, with most
equity capital sources around or even below the 2010 gures.
This raises concerns about the sustainability of biotechs
traditional role as a driver of innovation.
By innovation capital, we mean all equity capital (VC, IPO,
follow-on) that is the traditional source of nancing for an
industry sector heavily involved in start-ups or generating
innovation.
The impact of declining innovation capital on biotechs
traditional innovation role is exacerbated by the extremely
polarized distribution of invested capital. We now have a
division into haves and have-nots, where a very small
number of companies can afford to invest in innovation while
the large majority continue to ght for mere survival.
The unequal distribution of funds is clearly visible in public
company nancings. In terms of securing capital, the gap
between the upper quintile of successful companies and the
lower end widens every year.
Biotech nancing in the US and Europe by nancing type, 200511
Sustaining innovation is a major challenge due to lack of nancing.
Sustaining innovation is clearly an important issue for the many
small start-ups backed mostly by venture capital. Looking at
the total VC volume tells us that pre-crisis levels have not quite
been regained.
The total amount of US venture capital raised has grown since
2009; only Europe saw a decrease for 2010 and again in 2011.
Results for 2011 indicate no upswing in venture capital owing
into the biotech sector: the total of US$3.9 billion in 2011
equals the amount invested in the same period of the previous
year.
However, the reported nancing volume alone does not tell the
complete story.
Global biotechnology
trends
Source: Dealogic, Capital IQ, VentureSource, 2012
Whereas the reported numbers include the total amount
assigned in a nancing round, this amount is very often split
into tranches that are paid according to fullled milestones.
Therefore, available cash for companies is far lower, and instead
we have a drip feeding mechanism for almost the whole
venture-backed biotech sector.
In general, there is a signicant decline in the number of active
biotechnology VC investors in Europe and the US. This makes
it even harder for the remaining VC players to build consortia
for decent nancing rounds. Fewer active investors cannot
achieve a steady level in nancing rounds and volume and will
thus create more uctuation in the year-over-year statistics.
Analysis of VC nancing in individual countries over the last
couple of years reveals just such a uctuation.
The supply of innovation capital for biotech is also pressured
by competition. The high risk proles, long development times
and weak return record for life sciences start-ups make the
sector appear a relatively bad bet. Opportunities in sectors
without those challenges consumer IT, media and elsewhere
continue to take a bigger piece of the total VC pie, while
investment in biotech continues to fall to 10.7% in 2011 from
12.2% in 2010.
How can biotech regain and sustain its historical role as a life
sciences innovation engine?
Do more with less: broaden the scope of potential capital
sources and improve the deployment of capital to maximize
capital efciency
Adapt business models with a broader spectrum of options to
leverage company assets
Biotech venture capital raised in major regions (US$m), 200511
Year 2011 2010 2009 2008 2007 2006 2005
US 3,917 3,930 4,121 4,870 6,174 5,142 4,274
Europe 1,205 1,404 1,236 1,433 1,615 1,779 1,650
Canada 141 62 96 94 275 125 79
Total 5,263 5,396 5,453 6,397 8,064 7,046 6,003
We now have a division into haves and have-nots, where a very
small number of companies can afford to invest in innovation while
the large majority continue to ght for mere survival.
Do more with less a new capital agenda
Companies are now forced to spend capital more efciently.
Under the new capital agenda, companies need to look more
broadly for alternative capital sources such as grants and
alliances. Successful fund-raising will also need a better
understanding of partners and the markets needs. And it will
require a better ability to present a compelling story based on
solid data.
The new capital agenda expects companies to become better at
preserving, optimizing and wisely investing the money raised.
Adapting business models is driven by the need to reduce
dependency on scarce VC nancing sources. Biotech companies
have found that going back to the roots of biotech as
providers of technologies and platform tools offers more
chances to sustain their businesses.
Solid technology platforms can be leveraged in service models
that create revenue from the inception of the company. They
also ensure a very fast proof of the business and weed out non-
performers very quickly. Although nancially less attractive,
service models can be used to build a customer base that can
upon successful use of the technologies be transformed into
higher-value models with risk- and prot-sharing partnerships.
Most attractive, of course, will be those platforms that enable
the next generation of innovative products, which are urgently
needed in the pharmaceutical industry.
Global VC hot topics | Global biotechnology trends
Globalizing the VC industry 50 Back to basics 50
The way forward to sustaining innovation
It is especially unfortunate that biotechs ability to play a key
role in the life sciences innovation process is in jeopardy due to
lack of nancing. Biotech has a lot to offer in terms of research
ideas, technologies, new product paradigms, and diagnostic
and therapeutic approaches exactly the assets that are
needed to help ensure future progress and drive innovation in
the life sciences industry.
One logical way for biotech companies to deal with this problem
is to reduce dependence on traditional nancing instruments,
such as venture capital. This requires broadening the scope of
nancing sources and investors.
Biotech companies also need to consider more creative models,
such as providing services around technology platforms. High-
risk models around product development sponsored by VC
may be pursued sequentially after proof of the applicability and
attractiveness of the initial business ideas.
The third element in sustaining biotechs role as a driver of life
sciences innovation is helping to ensure capital efciency on the
spending side of the capital ow and adhering to a strict capital
agenda.
These three actions will yield a greater variety of ways to do
business and greater opportunities to be innovative.
It is encouraging that there are already numerous examples
of companies that have dened their individual way out of the
crisis by tapping into alternative nancing sources, positioning
themselves in new business partnerships and structuring
their businesses in a way to conserve capital as efciently as
possible.
The Capi tal
Agenda
Perlormduediliqenceon
counLerparLies
LsLablishsysLemsLo
moniLorperlormance
olserviceproviders
BoosLellciency,
aLLracLlundinq
(IP consolidation, synergies,
geographic reach, talents)
Diversily
(Portfolios, geography, offer)
OpLimizeporLloliolorouLcomes
(PM, rare diseases, capture data)
MakelxedcosLsvariable
SLreamlineR&D
approaches
(Fail fast, project funding)
LxLracLvaluelromlP
(Market rights, offer)
Lookbroadly
(Grants, alliances)
BecomeparLnerol
choice
(Deal structure, understanding
investors needs)
1ellabeLLersLory
,0ata,m||estones,effc|ency,uncerstanc
new market dynamics)
Capital Agenda
Dr. Siegfried Bialojan
Executive Director
European Life Science Center
Ernst & Young
Author
Q&A
Hans Peter Hasler
Chairman
HBM BioVentures
Zug, Switzerland
Opportunities lie in the now-realistic
valuations and the fact that fewer investors
are active in the VC segment.
Biotechnology
Ernst & Young: When you look at the biotech VC sector in
2011-12, what do you see as the key trends, growth drivers,
opportunities and challenges?
Hans Peter Hasler: The past 10 years have reduced biotech
company valuations, especially in the US, eight- to tenfold!
The higher complexity of product development and regulatory
requirements led to signicant increases in development costs
and a lower probability of success. For investors, the exit paths
are more difcult. IPOs suffer from ckle demand, and trade
sales are difcult due to the current negotiation tactics of
potential acquirers, leading to more back-loaded, milestone-
based deal structures. Opportunities lie in the now-realistic
valuations and the fact that fewer investors are active in the VC
segment.
Ernst & Young: How have your investment strategy and the
VC industry been affected by the current environment and
economy?
Hans Peter Hasler: The devaluations of biotech and pharma
had a signicant impact on the VC environment. In my
view, today, early-stage investments need to be covered by
long-term, mostly strategic investors (biotech and pharma
companies). Our VC rm will now focus more on later-stage,
less-risky opportunities in the private segment in order to
protect values and to generate gains for investors.
Ernst & Young: How do you view the current exit
environment and its impact on your portfolio companies?
Hans Peter Hasler: The partially weak pipelines in the industry,
and the fact that over US$200 billion of revenues will be
exposed to patent expiration in the coming ve years, increase
the appetite of large industry players for doing deals these
days. Therefore, the possibility of executing trade sales is still
good. IPOs remain difcult to realize and frequently are only
possible with signicant participation by existing investors.
Ernst & Young: What key trends do you see among
successful entrepreneurs pursuing sources of nancing
other than VC (e.g., private placements, angel investors)?
Hans Peter Hasler: So-called angel investors will remain
important in the biotech sector, particularly for seed nancings.
In Europe, the relative dearth of successful serial entrepreneurs
in biotech/medtech has led to a decline in VC money available in
the sector, and vice versa. An end to this vicious cycle is hardly
in sight.
Ernst & Young: These days, how do you typically advise
portfolio companies management regarding timing, growth
options, valuations, nancing alternatives, etc.?
Hans Peter Hasler: Advice is typically delivered through
active participation on the boards of investee companies. True
growth opportunities deliver multiple shots on goal and carry
limited or no binary regulatory risks.
Ernst & Young: Broadly speaking, what is your view of the
recent history of the VC industry, and what is your outlook
for the next 12 to 18 months?
Hans Peter Hasler: The recent years have led to
disappointments for biotech investors. The history is difcult,
although for the past two years, we have seen renewed
increases of valuations. We will change our focus and invest
in promising private companies, either with less-risky product
portfolios or cash-neutral or cash-generating businesses.
Overall, the pharmaceutical sector should see renewed growth
in the coming years. And current valuations are low; therefore,
this is a good time to invest, with the needed care and
competency.
Global VC hot topics | Global biotechnology trends
Gil Shwed
Founder, Chairman of the Board, and CEO of Check Point Software Technologies Ltd.
Ernst & Young Entrepreneur Of The Year 2010
Israel
Shwed launched Check Point Software Technologies Ltd. in 1993, becoming the rst to offer an integrated
rewall and VPN solution. With these breakthrough technologies as the catalyst, Schwed gave life to a new
market segment and quickly propelled Check Point to the top of what is now a multibillion-dollar internet
security industry.
Ernst & Young: Tell us how Check Point got to where
it is today.
Gil Shwed: Check Point started in 1993, when most people
hadnt heard about the internet. I knew the internet was
becoming a reality, and I believed it would change the world not
to the extent it did, but I was a big believer in it. And the internet
needed security; companies wanted to connect, but they wanted
to be secure. So our vision was to enable every company to
connect to the internet securely. Two other co-founders and I
grew the company step by step until it became the world leader
in rewalls, with more than US$1 billion in sales.
Ernst & Young: How important was venture funding to your
growth, and how did you select the right investors?
Gil Shwed: Today, there are plenty of VC funds in Israel, and its
a very developed market. But back in 1993, there was almost
nothing. Our venture funding came from another software
company investing in us. We raised about US$250,000, and
thats all the venture funding we ever needed. That investor
contributed a lot of value beyond just the money, mainly by
pushing us to achieve more results. They gave us some good
advice and some contacts, but their main value was in being
independent people who could tell us, You need to do more; you
can do more.
Ernst & Young: What advice would you pass on to other
entrepreneurs looking to get an injection of capital like that?
Gil Schwed: Actually, my main advice would be to minimize the
need for capital as much as possible. Entrepreneurs can get
addicted to it and think that if they only get more money, they will
be successful. We built Check Point on three people and almost
no expenses, and I think that was a great infrastructure for a
healthy company. Entrepreneurs need money and its good to
raise money, but minimize the need for it as much as possible.
Ernst & Young: And how do you stay close to your customers
with such a global presence?
Gil Shwed: We stay focused on what customers need, on what
will change the lives of our customers, not what the competition
is doing, nor what our engineers are thinking. We do this through
a lot of meetings, conferences, travel, panels and customer
advisory forums around the world.
The best ideas can come from anywhere from any employee
and any customer interaction. But I think the main source of
ideas is day-to-day interaction with customers and what
they need.
But then innovation requires good internal analysis of these ideas
and some good instincts about which ones we should invest in,
which innovation can be important. We have mechanisms to
brainstorm and collect ideas, and were creating mechanisms to
enable employees to propose an idea and receive a month or so
to develop a prototype before the idea is then re-evaluated.
Ernst & Young: What were some of the biggest challenges in
Check Points evolution from private to public company?
Gil Shwed: Actually, I didnt want to become public that much.
Not because, by the way, its good or bad, but because I think it
sometimes shifts peoples focus away from the business and the
customer and onto the stock market.
However, it was a very good, if tough, experience going for a
road show of three or four weeks doing the same presentation
seven or eight times a day, answering the same questions. It was
like basic training in the army they want to see if you can make
it and you can be strong enough. It does create some nancial
discipline as you go through the process of crystallizing some of
the nancial metrics, documenting everything, spending time
with the lawyers and the bankers. At the end, Im very happy
weve grown.
Ernst & Young: Which countries or markets do you think have
a true competitive edge in terms of technological product
innovation or capabilities?
Gil Shwed: Innovation can come from anywhere, though only
some places develop the ecosystem needed to keep attracting
people. Were seeing a lot of innovation with internet start-ups
from Europe, including Eastern Europe. And of course Boston
and Seattle are active. But I would say that Silicon Valley is still
the center of the world, and that Israel comes second.
Ernst & Young: How can governments help promote young
companies and stimulate entrepreneurship?
Gil Shwed: I think governments need to provide open
markets and good infrastructure. Taxation is a very important
consideration these days for attracting companies, because you
can open a company in most any country even if your customers
are somewhere else. So one of the things the Government
of Israel was smart about was providing low tax rates so that
companies like Check Point stayed in Israel. That said, my
principle when I started Check Point was to avoid being too
dependent on government actions. Build a business that just
stands on its own merits in the world commercial market. Im still
trying to stay true to that value.
Ernst & Young: You started the company that became Hyux
in 1989. To what do you attribute your ongoing success?
Olivia Lum: I think we have kept focusing on what we are good
at and what we believe in, no matter what the world thinks
or how it changes. Hyux has lived through three nancial
crises over the past 20 years. And after each one, we emerged
stronger because we maintained our focus throughout.
Ernst & Young: What was the most important attribute
you were looking for in selecting VC rms to invest in your
business?
Olivia Lum: We didnt have any venture capital before we
listed the company. After we listed, we were expanding and I
was looking for a strategic investor who could offer a different
perspective on the vision for the company. I also wanted
someone with ideas about how the company should position
itself in the global market.
Ernst & Young: How did the VC rms you worked with add
value to Hyux?
Olivia Lum: Mainly by acting as a sounding board for ideas. Its
always good to look to another party who is not in the business
but has an interest in the business, and who is willing to give
you a very frank opinion. Ive beneted a lot from asking many
questions and listening.
Ernst & Young: The world has become much more globalized
since your business started. Do you think that has been good
for entrepreneurs generally?
Olivia Lum: Entrepreneurs who want to move into other
countries have beneted. It really depends on whether you want
to be a global entrepreneur or just a country entrepreneur.
Protectionism can benet country entrepreneurs.
Ernst & Young: You operate in developed markets as well as
fast-growth emerging markets. What challenges does this
create for managing the business?
Olivia Lum: There are always two sides to a coin. In a more
developed country, you face more competition. In a less
developed country, you have less competition but more
bureaucracy and more unexpected processes you have to
deal with.
So I wouldnt say its easier to do business in developed
countries or in developing countries. Each has pros and cons.
So what we need to do is look at each country and focus on
what kind of value proposition we can give to that country.
Ernst & Young: Hyux is obviously a company that takes
innovation very seriously. How do you stay ahead of your
competition?
Olivia Lum: By embracing competition. I always tell people
that we have grown through competition. It is part of our
journey. It sharpens us and makes us more innovative and more
competitive. If you go into a country where 20 companies are
competing for a job, you should not shy away. If you are able to
win the job, you will be more innovative.
Ernst & Young: When you started, I believe Hyux was just
three of you now its more than 2,000. How do you maintain
a culture of innovation during that remarkable growth?
Olivia Lum: Unless you have a staff that shares your vision, you
cant grow. So one of the things I constantly do is tell stories
Inuence the newcomers, especially, to help them see why we
need to be innovative. Sharing the vision is the most important
thing. It is not easy to tell stories to everybody because you only
have 24 hours a day. But it is very important. Have a dinner
with them, have a lunch. And keep talking, because it needs to
be a never-ending story.
Ernst & Young: What do you look for in the people you bring in
to the company?
Olivia Lum: When you grow a company, you want people with
a lot of big-company experience. You cant bring in people from
smaller companies because that will only stie your growth.
Innovation always must be balanced by processes. After an
innovative idea, the processes must follow for building the
company on a rm footing.
Ernst & Young: If you could offer some advice to
governments around the world about how best to support
entrepreneurship, what would you tell them?
Olivia Lum: I always say entrepreneurs are like actors and
actresses. We like to play on a stage. If governments can
create a stage that is fair and big enough for us to dance on,
entrepreneurs will thrive.
Ernst & Young: Were here in Monte Carlo with 50 of the
worlds best entrepreneurs who have grown great businesses
like yours. What advice would you offer to the next generation
of entrepreneurs?
Olivia Lum: I feel that whatever entrepreneurs do, they must
have passion and conviction. Without that, the journey will be a
very challenging one. Whatever happens, hold on to your vision
and your passion.
Olivia Lum
Group CEO and President of Hyux Ltd.
Ernst & Young Entrepreneur Of The Year 2010 Singapore, and
winner of World Entrepreneur Of The Year 2011
Lum, the driving force behind Hyuxs growth and business expansion, transformed
a edgling cleantech company into a global group of more than 2,000 employees. By
providing innovative, cost-effective and sustainable water solutions, Hyux is playing a
part in securing humanitys water future, amid rising concerns about climate change.
Global VC hot topics | Entrepreneur interview
The index seeks to determine the relative
positioning of 80 countries and their
attractiveness for investment in VC/PE
assets. Not surprisingly, the countries
that fared well in the ranking excelled in
enhancing competition, openness and
professionalism within their borders.
The top 10 countries for 2011
PE/VC attractiveness
1 United States 6 Japan
2 United Kingdom 7 Australia
3 Canada 8 Sweden
4 Singapore 9 Netherlands
5 Switzerland 10 Germany
Key highlights of the index:
There is a major shift of focus from
traditional VC and PE countries toward
emerging regions. Emerging countries
attract investors with exceptional
growth opportunities that require
substantial funding. This shift is also
supported by the aftermath of the
nancial crisis, which strongly affected
the established VC and PE markets.
The BRIC economies and countries
in Asia, the Middle East and Africa
are increasingly becoming attractive
locations for VC and PE investment.
China, Brazil and the Middle East
tremendously increased their economic
activity and improved their capital
market structures and institutional
frameworks through the crisis. Other
markets, including Ireland and the
Eastern European countries, lost
attractiveness due to local effects of the
economic downturn and nancial crisis.
Two key criteria depth of capital
markets, and investor protection and
corporate governance make the
biggest difference in a countrys relative
VC/PE attractiveness. These two factors
lead to liquid and efcient capital
markets, and they evoke the required
professional community to secure deal
ow and exit opportunities for VC and
PE funds. This ultimately affects a
countrys attractiveness for institutional
investments in the VC and PE asset
classes.
Exceptional growth opportunity in
BRIC economies has its costs, including
poor investor protection, less liquid
exit markets, reduced innovation
capacity, and perceived or actual
bribery and corruption. Also, growth
and development is not widespread
but mainly concentrated in particular
hubs with the benet of wealth creation
allocated to rather small fractions of
the population. Unless these issues
are addressed, both a countrys
attractiveness and the relative
attractiveness of particular investments
may fall.
Lastly, the analysis shows that there
is a strong correlation between index
scores and countries average returns
to investors. Countries with high index
scores offer higher returns to investors
than countries with low index scores.
Taking action to improve a countrys
score by, for example, improving
corporate governance is key to
achieving the desired returns.
54 Back to basics
Attracted by exceptional growth
opportunities that require substantial
funding, VC and PE investors are
currently shifting their focus from
traditional VC and PE countries toward
emerging countries.
To help institutional investors decide
where to allocate capital and help
them navigate current uncertainties,
Ernst & Young has sponsored a broad
international survey to create the Global
Venture Capital and Private Equity
Country Attractiveness Index, which
measures 80 countries attractiveness to
investors in VC and PE rms.
The index is based on six key drivers,
shown below, that investors cite as
most important in shaping a countrys
VC markets (and thus determine the
relative attractiveness of a country for
investment in VC/PE assets).
You will nd a dedicated website online
with more information and where you
can download the 2011 annual of the
Global Venture Capital and Private Equity
Country Attractiveness Index free of
charge. In the section Regional and
Country Proles, you will nd a tool that
allows you to assess all the individual
countries and regions covered. Please
visit http://blog.iese.edu/vcpeindex/.
(The 2011 index and report were
sponsored by Ernst & Young and
produced by leading European business
school IESE/CIFF.)
Economic activity (GDP, ination,
unemployment)
Depth of capital markets (size and
liquidity)
Taxation
Investor protection and corporate
governance
Human and social environment
(e.g., human capital, labor market
policies, crime)
Entrepreneurial culture and
opportunities (e.g., innovation
capacity, the ease of doing business,
the development of high-tech
industries)
Drivers of VC/PE
attractiveness
of countries
Global VC/PE Country
Attractiveness Index
Contacts
Global Maria Pinelli +44 20 7980 0960 maria.pinelli@ey.com
Americas Bryan Pearce +1 617 585 0499 bryan.pearce@ey.com
EMEIA Julie Teigland +49 621 4208 11510 julie.teigland@de.ey.com
France and Philippe Grand +33 04 78 17 57 32 philippe.grand@fr.ey.com
Luxembourg
Germany, Switzerland, Julie Teigland +49 621 4208 11510 julie.teigland@de.ey.com
Austria
United Kingdom Simon Pearson +44 20 7951 0418 spearson@uk.ey.com
and Ireland Steven Lang +44 20 7951 4795 slang@uk.ey.com
Ian Oliver +44 1189 281197 ioliver@uk.ey.com
India Mayank Rastogi +91 22 6192 0850 mayank.rastogi@in.ey.com
Greater China Lawrence Lau +86 21 2228 2816 lawrence.lau@cn.ey.com
Israel Oren Bar-On +972 3 5687 1102 oren.bar-on@il.ey.com
Special thanks to:
Adj. Prof. Dr. Martin Haemmig
CeTIM, Germany/Netherlands (former Senior Advisor on Venture Capital, Stanford University SPRIE)
The Globalization of Venture Capital
Website: www.MartinHaemmig.com
Dr. Martin Haemmigs venture capital research covers 13 countries in Asia, Europe, Israel and the US. He lectures
or researches at Stanford University, University of California Berkeley, INSEAD, UniBW Munich, ETH Zurich, as
well as at Chinas Peking, Tsinghua, Renmin, Fudan and JiaoTong Universities, plus Indias Institute of Technology,
Science and Management in Delhi, Mumbai, Bangalore and Hyderabad. He is the author of The Globalization of Venture Capital
(English and Chinese). He is a former Senior Advisor on Venture Capital at Stanford University SPRIE and was the advisor on
venture capital and internationalization for Chinas largest science park (Zhongguancun). Martin Haemmig earned his electronics
degree in Switzerland and his MBA and doctorate in California. He worked for almost 20 years in global high-tech companies in
Asia, Europe and the US before returning to his academic career. He became a Swiss national champion in marketing in 1994.
Ernst & Young global VC trends team 2012
Project Sponsor Maria Pinelli, Global Vice Chair, Strategic Growth Markets
Supervising Editor Sandra Feldner Vandergriff, Americas Strategic Growth Market
Editor/Writer Jennifer Lee-Sims, Global Strategic Growth Market
Associate Editor Russell Colton, Copy Editor, Business Support Center
Senior Analyst Eva Chan, Public & Private Capital, Strategic Growth Markets
Data Analyst Ashima Gandhi, Analyst, Strategic Growth Market
Ernst & Young
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